The biggest problem is the one being talked about on the evening news every night; jobs and the economy. A loan modification that looks like it will be able to bring a homeowner’s monthly mortgage obligation back in line with his current financial situation ceases to function properly if the family’s income takes a hit due to a layoff, plant closing, or drastic cut work in hours as the economy continues to slow down. As a rule of thumb, loan modifications require a debt to income ratio of 35% which can be steep even in the best of times. Throw in some unemployment or under employment after the loan modification is completed and you have a recipe for trouble.

Another issue is that the debt to income level can become much greater if consumer debt is included in the calculation. It is not unusual for the total sum of debt to income including other debts to come in around 60% which, according to experts, virtually guarantees a default even if the borrower’s financial situation remains stable. The “not shocking at all” conclusion here is that consumers are still carrying too much debt across the board and are going to need to retrench at some point. The consumer debt side of the equation should keep debt settlement companies busy for years to come.

A third factor is that many borrowers perceive a loan modification as the end of their worries and use the money they are now saving on their mortgage to accumulate additional forms of debt. After a few months they end up right back where they were at the beginning of the loan modification process, over their heads on their monthly payments. The only difference is that their monthly obligations are now divided between their mortgage and additional credit card bills.

There are several lessons to be learned from the recent studies on post loan modification defaults. The first is that homeowners must not get complacent once their loan modification is done. Jobs are still being lost and work hours are still being cut. If the newly reduced mortgage payment allows for some money to be saved that is what should happen. Second, wherever possible, reduce consumer debt as soon and as much as possible. If credit card debt is unworkable start looking for a debt settlement company with a solid reputation and a TASC certification. Be proactive in managing debt and don’t wait until trouble is knocking at the door to start developing a plan. Third, do not look at a completed loan modification as a ticket to “Party Like it’s 1999”. Avoid adding debt at all costs. There may be a time for that, but it’s definitely not now.