BOSTON — Homeowners who had mortgages modified recently are faring better than those who did so earlier in the housing crisis, according to a report released Tuesday, possibly debunking predictions of a huge wave of defaults to come.

The State Foreclosure Prevention Working Group warned of other troubling signs, however, on the same day that a separate industry report showed the most severe July sales drop-off for existing homes in 15 years.

The group of 12 state attorneys general and state banking regulators said that foreclosures still easily outpace the number of loan modifications. Modifications lower monthly payments and cut the odds of losing a home.

Nearly three years into the foreclosure crisis, the group of state officials also found that nearly 63 percent of homeowners who are at least 60 days behind on their mortgage payments aren’t taking part in either government or private foreclosure prevention programs.

Banking officials warned that lenders must aggressively seek out homeowners who are teetering on the edge, even if it means short-term pain for banks.

“There is still a tremendous amount of work to be done to prevent unnecessary foreclosures,” said Neil Milner, president and CEO of the Conference of State Bank Supervisors, which is part of the working group.

The working group compared delinquencies for mortgages modified last year with those revised in 2008, and whether borrowers were keeping up with payments six months after terms were changed.

Borrowers getting modifications in 2009 were nearly 50 percent less likely to end up at least 60 days behind than those with modifications in 2008. About 15 percent among the 2009 group ended up becoming seriously delinquent six months after modification, versus nearly 31 percent for the 2008 group.

The reduction “suggests that dire predictions of high re-default rates may not come true,” the report said, noting some analysts have predicted re-default rates as high as 75 percent.

The report said recent modifications that reduce principal balances on loans have a lower default rate than those that merely cut the interest component of monthly payments.

However, most banks don’t trim the overall balance when they modify loans, according to the report. Only one in five modifications reduced the loan amount.

But through adjustments of interest rates, about 89 percent of first-quarter modifications involved some cut in monthly payments, the report said.

However, the absence of loan balance reduction in most modifications will hamper future foreclosure prevention efforts, the report said.

Michael Fratantoni, vice president of research and economics with the Mortgage Bankers Association, said modifications must strike a balance between helping borrowers stay in their homes, and enabling lenders and investors to avoid taking big losses.


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