Mortgage Performance: Fighting Rising Rate of Foreclosures with Loan Modifications

A joint report from the OCC and OTS, which includes 64% of allrnoutstanding mortgages, shows that instances of delinquency continued to increasernin the second quarter.  Particularly of note is the increasing growth rate of delinquencies among  loans backed by prime borrowers.  In general, the rate ofrnincrease in delinquencies slowed somewhat, but the report notes this may bernpartially due to seasonal effects.

Unequivocally positive however, was the dramatic increase in thernnumber of loan modifications.

The report notes “The impact of this increase in modifications,rnparticularly those with reduced monthly payments, will only be seen in futurerndata. Likewise, the number of modifications recorded in this report does notrnreflect actions taken under the Administration's “Making Home Affordable”rnprogram, which was announced in March and implemented after thisrnreporting period.

Roughly 9 out of 10 loans were current at the end of the quarter,rnabout the same percentage as the previous quarter.  However, thernproportion of seriously delinquent loans increased with loans “60 or more daysrnpast due and loans to delinquent bankrupt borrowers increasing by nearly 9rnpercent from the previous quarter to 5 percent of all mortgages in thernportfolio.”

By segment, prime loan delinquencies increased more than 20% to arntotal of 2.9%.  This segment accounts for over 2/3rds of thernportfolio.  Though not as rapid as the prime loan increase, the subprimernsegment also rose 1.5% over the previous quarter. 

Following the expiration of the foreclosure moratorium (March 6, 2009), the number of foreclosures inrnprocess increased to 844,389 and now account for 2.5% of the portfolio. rnThis was a 21.8% increase in foreclosure activity versus the previousrnquarter and 72.6% increase versus the same quarter a yearrnago.  With prime loans already understood to comprise a vast majority of thernportfolio, this trend is expected to continue as many borrowers took ARM terms that locked in their interest rate for 5 to 10 years.  The data showsrnthat in addition to increasing foreclosures, 90+ day delinquencies arernincreasing at a far greater pace than 30-60 or 60-90 day delinquencies (whichrnhave actually decreased in some cases).

But the dire numbers are not without some redemption.  Homernretention actions in the form of loan modifications and payment plans arernincreasing at a rapid rate as well, somewhat offsetting the negativerndata.  New retention actions rose 55.3%  Unfortunately, any impactsrnof these actions on foreclosure and delinquency statistics will not be observedrnuntil next quarter's report.

Of these plans, a majority involve reduced interest rates and therncapitalization of late payments and fees.  Contrary to some opinions we'vernheard, the percentage of loan balances that are actually reduced is largelyrninsignificant at just 1.8%. 

In addition, another surprising finding is that almost half of allrnmodification in the portfolio DID NOT involve a decrease in monthly principal andrninterest payment. 

HOWEVER, the report notes that modifications where payments were reduced have led to fewer re-defaults. rnHopefully this data will lead servicers to more freely structure loan modifications in a manner that will reduce monthly payments.

With the rapid increase in work-outs, the question of long termrnviability grows more and more important.  To that end, the report hasrnadded data to address this issue by comparing the performance of modificationsrnimplemented during 2008 with modifications completed in  first quarter of 2009.  In other words, “sure, it's great that all these loans are beingrnmodified, but is that a sustainable solution to the problem?”

The data indicates that although the overall amount of delinquencyrnis ultimately decreased, the re-default rates remain quite high, and increasernwith time.

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