Nearly six out of 10 troubled borrowers who were able to negotiate loan modifications during the first quarter re-defaulted after eight months, Comptroller of the Currency John C. Dugan said today.
Offering a "sneak preview" of a quarterly report to be released next week tracking the performance of 35 million loans, Dugan said lenders nearly doubled the number of mortgage modifications between the first quarter and third quarter, and that foreclosures starts decreased by 2.6 percent during the third quarter.
He called the poor performance of loans that were modified "somewhat surprising, and not in a good way."
After three months, nearly 36 percent of the borrowers had re-defaulted and were more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent. The data was similar for mortgages modified in the second quarter, with 39 percent re-defaulting after three months and 51 percent after six months.
In the past, lenders have come under fire for offering borrowers repayment plans that allow them to resume making payments on a loan without changing loan terms such the interest rate, repayment period or loan principle. Critics say that without changes to the loan terms, borrowers who had got behind on their payments before are likely run into trouble again.
The HOPE NOW coalition of loan servicers says that in the first nine months of 2008, its members engaged in 1.6 million workouts, including about 950,000 repayment plans and 648,000 mortgage modifications.
Dugan said the dismal numbers collected by the Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS) exclude repayment plans, and track only instances in which lenders modified loan terms to help borrowers continue making payments.
One possible explanation for the poor performance of modified loans, he said, is that lenders did not reduce monthly payments enough to be truly affordable to the borrowers. Other possible explanations are that the mortgages were so badly underwritten that the borrowers could not afford them even with reduced monthly payments, or that borrowers who received modifications replaced lower mortgage payments with increased credit card debt.
Not all re-defaulted mortgages go into foreclosure, Dugan said, and loans that are 60 days past due may be a better predictor of ultimate failure. But the data showed 35 percent of modified loans were 60 days past due after six months.
Since July, 2007, the HOPE NOW coalition of loan servicers says it’s done about 2.7 million workouts. While two-thirds of those workouts were repayment plans, the pace of loan modifications has nearly doubled since the end of last year, hitting a rate of more than 1.2 million per year in October.
There were 264,139 foreclosure sales during the third quarter, the group said, and for every foreclosure sale HOPE NOW loan servicers accomplished 1.34 loan modifications. That compares 135,330 foreclosure sales and 0.56 loan modifications per foreclosure sale in the same quarter a year ago — an indication that while foreclosure sales are growing, loan modifications are growing faster.
The Federal Deposit Insurance Corp. has proposed insuring lenders for up to half of their losses to encourage them to do more loan modifications. It would cost taxpayers about $24 billion to ensure 2.2 million loan modifications, assuming one in three loans re-defaulted, the FDIC estimates (see story).
In theory, re-defaults would be minimized because the government would only provide insurance on loans modified to provide a 31 percent mortgage debt-to-income ratio. As proposed by the FDIC, government insurance would not kick in until borrowers had made at least six payments on their modified loan.
The Bush administration has not embraced the plan, but last month announced Fannie Mae, Freddie Mac and HOPE NOW loan servicers would employ a streamlined process for modifying the mortgage terms of some borrowers who have missed three or more payments, reducing their payments to 38 percent of gross monthly income.
The Mortgage Bankers Association last week released delinquency and foreclosure numbers that, like the statistics collected by OTC and OCC, suggest that many foreclosures are merely being postponed, not prevented.
The MBA said foreclosures starts remained essentially flat during the third quarter, but that the number of loans 90 days or more past due jumped more than expected. That indicates lenders — who in some states face new laws that slow down the foreclosure process — are waiting longer to foreclose on delinquent loans.
Based on its surveys of lenders, the MBA said one in 10 home loans was delinquent or in foreclosure at the end of September, and that 2.2 million homes could enter the foreclosure process in 2008, and that next year could be worse (see story).
Foreclosures, rising unemployment and tight credit could push home prices in many markets below historical price-to-income ratios where they might otherwise find support, according to a report by IHS Global Insight (see story).
Dugan spoke during a panel discussion at the Office of Thrift Supervision’s National Housing Forum. Also speaking at the even was New Jersey Gov. Jon Corzine, who called for a three to six month foreclosure moratorium.
California, North Carolina, Maryland and New Jersey have laws that slow down the foreclosure process, and Massachusetts and Connecticut have strengthened the right of some borrowers to "cure" delinquent loans.
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