Loan
servicers approved nearly three times as many short sales in the last three
months of 2008 as they did in the first quarter of the year, but still
completed close to six foreclosures for every short sale, according to a report
issued by bank regulators today.
The report also showed that delinquencies continued to climb, with the biggest
jump in prime mortgages, and that nearly half of borrowers granted loan
modifications were seriously delinquent or in foreclosure within eight months.
The worsening economy and job losses were seen as possible explanations for the
high re-default rate, along with excessive borrower leverage, poor initial
underwriting, and other "issues affecting consumer willingness to
pay," the report said.
The U.S. Department of Labor today reported that unemployment rose to 8.5
percent in March, as another 663,000 Americans lost their jobs. Since the
recession began in December 2007, 5.1 million jobs have been lost, with almost
two-thirds of the decrease occurring in the last five months.
In their report, bank regulators said loan modifications were more effective
when they reduced monthly payments by more than 10 percent, with only 23
percent of those loans seriously delinquent six months after a modification.
That compares with the 46 percent of all loans modified during the second
quarter that were seriously delinquent after eight months.
Only 29 percent of loan modifications lowered monthly payments by more than 10
percent, and 32 percent of loan modifications actually increased monthly
payments.
The data show modification strategies that don't reduce monthly mortgage
payments "run the risk of unacceptably high re-default rates," said
Comptroller of the Currency John Dugan in a statement accompanying the release
of the report. "They should only be used on a case-by-case basis where
borrowers and servicers can have confidence that the modification is likely to
be sustainable."
The findings bode well for the Obama administration's "Making Home
Affordable" loan modification and refinance initiative, Dugan said,
because it is based on lowering monthly payments to achieve sustainable
modifications.
The quarterly report on mortgage performance by the Office of the Comptroller
of the Currency and the Office of Thrift Supervision includes data from nine
national banks and four thrifts, and covers about two-thirds of all outstanding
mortgages.
While lenders boosted the number of workouts by 11 percent during the fourth
quarter, to 301,648, a growing proportion -- six out of 10 -- were payment
plans, which critics say are less effective than loan modifications.
In a payment plan, arrears are often added onto the back end of a loan, and
monthly payments aren't reduced. The study said servicers may be reporting more
"trial" modifications as payment plans.
About 91 percent of loans tracked in the report had been securitized and sold,
and were being serviced on behalf of third parties. The re-default rate on
those loans -- 49.5 percent nine months after a modification -- was
significantly higher than loans held in servicer's own portfolios (29.7 percent).
Loan servicers "generally have greater flexibility to modify loans held on
their own books, especially before default has occurred, than they have with
respect to loans serviced for others, which are often subject to more rigid
contractual limitations on modification," the report said.
That could also help explain the continued reluctance of loan servicers to
approve short sales of properties rather than foreclose on them.
The report showed loan servicers increased the number of short sales approved in
each quarter of the year, raising the total from 5,523 in the first three
months of the year to 15,395 in October, November and December. Deeds in lieu
of foreclosure doubled from 1,065 during the first quarter to 2,182 in the
last.
Although the number of short sales nearly tripled from the first quarter to the
fourth, there were almost six completed foreclosures for every short sale
during the final three months of the year. That's a substantial improvement
from the first quarter, however, when there were nearly 14 completed
foreclosures for every short sale.
Completed foreclosures jumped 65 percent from the first quarter to the third,
peaking at 126,280 before falling 29 percent in the final quarter of the year
to 89,634.
For every completed foreclosure, short sale, or deed in lieu of foreclosure
during the fourth quarter, loan servicers initiated nearly three loan
modifications or payment plans.
Looking ahead, the number of newly initiated foreclosures declined for the
second quarter in a row, falling 6.5 percent from the third quarter to 262,906.
But the percentage of current and performing mortgages decreased from 93.3
percent at the end of the first quarter to 90 percent at the end of the fourth
quarter. Delinquencies climbed across all categories of loans: prime, alt-A and
subprime. The biggest percentage jump was in prime mortgages, with 2.4 percent
of loans 60 days or more delinquent, up 115 percent from the 1.1 percent
seriously delinquent rate in the first quarter.
The percentage of subprime loans that were seriously delinquent increased from
10.8 percent at the end of the first quarter to 16.4 percent by the end of the
year. Serious delinquencies for alt-A loans grew from 5.2 percent to 9.1
percent during the same period.
The latest numbers from the HOPE NOW Alliance of loan servicers showed a record
243,000 foreclosure starts in February, a 12 percent increase from the month
before and a 36 percent increase from a year ago. A sharp uptick in foreclosure
starts among prime loans drove the increase.
The Federal Housing Finance Agency reported last month that the percentage of
serious delinquencies among 30.7 million residential mortgages owned or
guaranteed by Fannie Mae and Freddie Mac more than doubled from March to
December, to 3 percent. Fannie and Freddie's loan servicers repossessed about
eight homes for every short sale they approved in 2008, taking back 145,183
homes