Via Yves Smith at Naked Capitalism, here’s another reason why passing cramdown now is important: the existing loan modifications aren’t working.

Mortgages modified in the third quarter failed at a faster pace than those revised in the first, and the delinquency rate on the least risky loans doubled, signs of deteriorating credit quality, U.S. regulators said.

Loans modified in the first quarter to help borrowers keep their homes fell delinquent 41 percent of the time after eight months, and second-quarter loans had a 46 percent default rate, the Office of the Comptroller of the Currency and Office of Thrift Supervision said in a report today. Third-quarter trends “are worsening,” the agencies said.

Yves notes that most of the mods that lenders are offering today involve interest rate reductions and lengthening maturities, which aren’t as successful as mods that reduce the principal owed. Unfortunately, principal reduction is rarely offered due to the way most mortgages today are securitized (i.e., cut up into pieces and sold to far-flung investors). The only thing that is likely to reverse this trend of increasing modification failures is if bankruptcy judges are given the power to rewrite loan terms.