July 14 (Bloomberg) -- More than two of every five subprime borrowers whose mortgages were reworked in the first half of 2007 are defaulting anyway, Moody's Investors Service said.

Among subprime adjustable-rate mortgages modified in the first half of last year, 42 percent were at least 90 days late on March 31, the ratings firm said in a report today.

Modifying loans granted to consumers with poor credit records has gained favor as record numbers fail to keep up with payments and home prices tumble. Loans reworked more recently may perform better than ones modified in early 2007 because lenders are increasingly lowering interest rates and offering changes to consumers with fewer missed payments, Moody's said. That's different from 2007, when lenders focused on enforcing repayment plans.

``These differences could possibly result in a lower re- default rate going forward,'' Aashish Marfatia, an analyst in New York at Moody's, wrote in the report based on a survey of 10 servicers managing $550 billion of loans.

Modification rates for subprime ARMs rose to 9.8 percent of all loans whose initial ``teaser'' rate periods have expired since the beginning of 2007, up from the 3.5 percent recorded in a December survey, Moody's said.

``In all, even with the high re-default rate, Moody's believes the increase in proactive efforts by servicers to modify subprime mortgage loans may modestly lower cumulative losses incurred by securitization pools,'' Marfatia wrote.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: July 14, 2008 13:22 EDT