Redefault Rates on Loan Modifications Actually Improving, Says State Foreclosure Prevention Working Group
Without Greater Emphasis on Principal Reduction and Stronger Foreclosure Prevention Programs, Foreclosures Will Continue to Significantly Outpace Efforts
August 24, 2010
New York, NY: While the number of foreclosures continues to seriously outpace the number of loan modifications being made, there are reasons to be optimistic about the performance of those loan modifications. According to a report issued today by the State Foreclosure Prevention Working Group, recent loan modifications are performing better than modifications made earlier in the mortgage crisis.
Differing from some analysts that have predicted redefault rates as high as 65% or 75%, the State Working Group stated that the improvement in loan modification performance over the past year actually suggests that we will see lower redefault rates in the future. According to the data the group has collected from nine mortgage servicers, loans modified in 2009 are 40% to 50% less likely to be seriously delinquent six months after modification than loans modified during the same time period in 2008.
The Office of Thrift Supervision (OTS) and the Office of the Comptroller of Currency (OCC) recently reported a similar reduction in redefault rates in their Mortgage Metrics Report for the Fourth Quarter of 2009. The agencies reported that 48.1% of the loans modified in the third quarter of 2008 were 60 or more days delinquent six months after modification, but only 27.7% of the loans modified in the third quarter of 2009 became delinquent – a redefault rate drop of more than 40%.
The redefault rate is even lower for loan modifications that had significant principal reduction of more than 10% of the principal balance. A comparison of modifications with principal reductions made in August and September 2008 to modifications with principal reductions made in August and September 2009 showed that redefaults fell from 35.4% to just 12.9%. The State Working Group believes it is important for servicers to increase their strategic use of principal reduction to maximize the long-term success of loan modifications.
“Sustainable, permanent modifications are a key part of resolving the mortgage crisis faced by this country. The data shows that modifications that include a principal reduction perform significantly better than others,” said Richard H. Neiman, Superintendent of Banks for New York State. “We expect banks to take the performance of these modifications into account when deciding the best options for both consumers and investors. Progress on making modifications is an important step in the right direction, but we must not lose sight of long-term sustainability of these loans.”
The State Working Group noted that despite the progress made on the sustainability of the loan modifications being made, far too many seriously delinquent loans were still not in any form of loss mitigation. Without improvements to foreclosure preventions efforts, the group anticipates that hundreds of thousands of these seriously delinquent homeowners could end in foreclosure.
Other Working Group findings include:
- foreclosures continue to outpace modifications – 6 out of 10 seriously delinquent borrowers are still not in any loss mitigation activity;
- the majority of loan modifications (89.3%) tracked by the Working Group for the first quarter of 2010 showed some reduction in payments, and 77.6% lowered the monthly payment by more than 10%;
- only 21.2% of loan modifications actually reduce the loan’s principal amount;
- permanent loan modifications dipped in 2009 as servicers transitioned to HAMP.
“A national mortgage performance database would give us much greater insight and guidance into the issues that are facing mortgages and modifications. Just as industry members and agencies such as the OCC are limited in the data they received and analyze, the State Working Group is limited to the data that it receives voluntarily from mortgage servicers. We need national reporting requirements and standards for all institutions that handle mortgages to ensure that state and federal agencies have the data that is so crucial to properly regulating and monitoring the mortgage industry,” said Superintendent Neiman.The State Foreclosure Prevention Working Group, which consists of 12 state attorneys general (AZ, CA, CO, FL, IL, IA, MA, NV, NC, OH, TX, WA), bank regulators for NY, NC, and MD, and the Conference of State Bank Supervisors, was founded in 2007 and has issued four prior reports, which are available at http://www.csbs.org/regulatory/Pages/SFPWG.aspx.
The New York State Banking Department is the regulator for all state-chartered banking institutions, virtually all of the United States offices of international banking institutions, all of the State’s mortgage brokers, mortgage bankers, check cashers, money transmitters and budget planners. The aggregate assets of the depository institutions supervised by the Banking Department are more than $2.4 trillion.
In addition to regulating banking institutions, the Banking Department is active in informing and educating all New Yorkers on banking matters. To contact the Banking Department, please call 1-877-BANK-NYS or visit our Web site at www.dfs.ny.gov.