COMMENTARY: by JONATHAN FOXX
Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.
The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) released their 3rd quarter 2010 mortgage Mortgage Metrics Report.
Published in December 2010, the findings are compiled from data on first-lien residential mortgages serviced by national banks and federally regulated thrifts.
The report provides information on loan performance through September 30, 2010, the year's 3rd quarter.
I think the report offers a broad view of mortgage performance, because the mortgages in this portfolio comprise 64% of all mortgages outstanding in the United States, that is, 33.3 million loans totaling almost $6 trillion in principal balances.
According to the report, mortgage delinquency levels:
- Remained "elevated" and foreclosures (new, in process, and completed) increased during the 3rd quarter of 2010.
- New home retention actions (modifications, trial-period plans, and payment plans) decreased during the quarter.
- The overall credit quality of the portfolio of first-lien mortgages serviced by the largest national banks and thrifts seems to have remained "steady" during the 3rd quarter of 2010, after showing some improvement during the previous two quarters.
The full report is available in our Library.
Let's look now (see below) at five tables from the report and consider some statistical analysis.
According to this table, servicers implemented 470,321 new home retention actions during the 3rd quarter. This represents a 17% decline from the previous quarter.
- HAMP modifications decreased by 45.7% during the quarter while other modifications increased by 10.1%.
- New HAMP trial plans decreased by 33.2%, and other trial-period plans decreased 21% from the previous quarters.
The report indicates that servicers attribute this decline resulted from requirements to obtain, verify, and analyze borrower income before beginning a trial period plan and the falling number of borrowers who are eligible for existing modification programs.
The findings indicate that servicers modified 1,506,025 loans from the beginning of 2008 through the 2nd quarter of 2010.
- At the end of the 3rd quarter of 2010, 48% of these modifications remained current or were paid off.
- Another 10.2% were 30 to 59 days delinquent.
- Almost 24% of the modifications were seriously delinquent, 9.4% were in the process of foreclosure, and 4.2% had completed the foreclosure process.
- Modifications that reduced payments by 10% or more performed better than modifications that reduced payments by less than 10%.
- At the end of the third quarter, 58.9% of modifications that reduced payments by 10% or more were current and performing, compared with the 33.4% of modifications that reduced payments by less than 10%.
This table shows that more recent modifications have performed better than earlier modifications every quarter since the end of the first quarter of 2009, though the rate of improvement "appears to be moderating."
- At 6 months after modification, 20.2% of the modifications made in the 4th quarter of 2009 were seriously delinquent compared with 33.5% of the modifications made during the second quarter of 2009.
- The report states that this trend of lower delinquency rates following modification "corresponds with the increasing emphasis on repayment sustainability through reduction of the borrower's monthly payment, verified borrower income, and payment affordability relative to income."
One of the more interesting tables is this one, because it indicates that modified mortgages held in the servicers' portfolios performed better than modified mortgages serviced for others.
- The report asserts that this variance may result from differences in modification programs, servicers' additional flexibility to modify mortgage terms, and the underlying quality of loans serviced for different investors.
- Note that the modified government-guaranteed mortgages had the highest delinquency rates at 6, 9, and 12 months following modification, consistent with their higher overall delinquency rates.
This table charts modified loan performance, by change in monthly payments, a statistical array of data that we have commented on in previous compliance updates, particularly with respect to the HAMP program.
The report finds that modifications with decreased monthly payments consistently had lower re-default rates than modifications that left payments unchanged or increased payments.
- After 6 months, 14.6% of modifications implemented since the second quarter of 2009 that decreased monthly payments by 20% or more were seriously delinquent.
- In contrast, 28.1% of modifications that left payments unchanged and 42.% of modifications that increased payments were seriously delinquent.
The report asserts that while lower payments reduce monthly cash flows to investors, the payments may result in longer-term sustainability.
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