OCC and OTS: Foreclosures Increase, but HAMP Mods Performing Better

From The Office of the Comptroller of the Currency and The Office of Thrift Supervision OCC and OTS Mortgage Metrics Report

This OCC and OTS Mortgage Metrics Report for the third quarter of 2009 provides performance data on first-lien residential mortgages serviced by national banks and federally regulated thrifts. The report covers all types of first-lien mortgages serviced by most of the industry’s largest mortgage servicers, whose loans make up approximately 65 percent of all mortgages outstanding in the United States. The report covers about 34 million loans totaling approximately $6 trillion in principal balances and provides information on their performance through the end of the third quarter of 2009 (September 30, 2009).

Overall, mortgage performance continued to decline as a result of continuing adverse economic conditions including rising unemployment and loss in home values. The percentage of current and performing mortgages fell to 87.2 percent of the servicing portfolio. Seriously delinquent mortgages—loans 60 or more days past due and loans to delinquent bankrupt borrowers—rose to 6.2 percent of the servicing portfolio. Foreclosures in process increased to 3.2 percent, while new foreclosure actions remained steady for the third consecutive quarter at 369,209. Of particular note, delinquencies among prime mortgages, the largest category of mortgages, continued to climb. The percentage of prime mortgages that were seriously delinquent in the third quarter was 3.6 percent, up 19.6 percent from the second quarter and more than double the percentage of a year ago.

…

Servicers initiated 273,913 trial period plans under HAMP during the third quarter, for a total of 354,324 HAMP trial period plans from the announcement of the program in March through the end of September. In addition to HAMP actions, servicers implemented 121,314 trial period plans for their proprietary homeowner assistance programs, a 100 percent increase over the second quarter. HAMP requires borrowers to provide, and servicers to verify, various financial documentation. Borrowers must also successfully make payments during a three-month trial period before their loan is permanently modified. While significant volumes of HAMP trial period plans began during the summer and fall of 2009, conversion to permanent modifications has been slow. In this regard, only 781, or less than 1 percent of the trial period plans as of September 30, 2009, had been converted to permanent HAMP modifications. Part of the slow conversion has been due to servicers having insufficient staff and systems to process the increasing number of HAMP trial period plans. In addition, in an effort to ramp up the number of HAMP trial period plans, servicers initiated plans based on oral representations from borrowers. In order to complete a modification, servicers must receive and process the necessary documentation required by HAMP, and that has not always been forthcoming. Once required documentation is received, servicers report that a significant number of these borrowers do not qualify under the current HAMP guidelines, either because a sustainable modification could not be created to meet the net present value test or the current mortgage is already considered  affordable based on HAMP’s 31 percent debt-to-income standard. The Department of the Treasury (Treasury) announced an initiative on November 30, 2009 to help convert trial period plans to permanent modifications.

Despite growth in the number of modifications, modified loans continue to re-default at high rates. Measuring re-default as 60 or more days delinquent or in foreclosure, more than half of all modified loans re-defaulted within six months of modification.

Early indicators suggest more recent vintages with a higher percentage of modifications that reduce monthly payments are performing better than older vintages. More than 80 percent of all loan modifications implemented in the third quarter reduced monthly principal and interest payments for the borrower. Modified terms were primarily interest rate reductions and term extensions. Modifications with principal reductions increased to 13 percent of all modifications, up from 10 percent in the second quarter and 3 percent in the first quarter.

Mortgage Performance

• The percentage of current and performing mortgages in the portfolio fell to 87.2 percent of the total servicing portfolio—a decrease of 1.5 percent from the previous quarter. Serious delinquencies reached 6.2 percent of the servicing portfolio, an increase of 16.7 percent from the previous quarter. Foreclosures in process reached 3.2 percent, an increase of 9.4 percent.
• Serious delinquencies increased in all risk categories, with the greatest percentage increases in the prime category and the “other” category, which includes mortgages for which credit scores are unavailable. The seriously delinquent rate for prime mortgages, the largest risk category of mortgages in the servicing portfolio, has more than doubled over the last year as financial difficulties have increasingly affected this most creditworthy category of borrowers.
• Payment Option Adjustable Rate Mortgages (Option ARMs) continued to perform worse than the overall portfolio as a result of the added risk characteristics and geographic concentration of these loans. At the end of the third quarter, just 67.7 percent of Option ARMs were current and performing; 16.0 percent were seriously delinquent; and 11.9 percent were in the process of foreclosure.
• Mortgages guaranteed by the U.S. government, primarily through the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), also showed higher delinquencies than the overall servicing portfolio. Serious delinquencies increased to 8.2 percent of all government guaranteed mortgages, up from 7.5 percent in the previous quarter. An additional 2.5 percent were in the process of foreclosure.

Modified Loan Performance

• The percentage of modified loans 60 or more days delinquent or in process of foreclosure increased steadily in the months subsequent to modification (see Table 2). Modifications made after the third quarter of 2008 appeared to perform relatively better than older vintages. The most recent modifications made in the second quarter of 2009 had the lowest percentage of mortgages (18.7 percent) that were 60 or more days delinquent three months subsequent to modification. This lower three-month re-default rate may be an early indicator of sustainability for loan modifications that reduce monthly payments

The good news is that HAMP modifications are generally performing better than pre-HAMP modifications. The bad news is that 18.7% are 60 days or more delinquent within the first 3 months…meaning they probably never even made one payment.