Despite numerous improvements in the area of default management – including significant increases in servicers' loss mitigation staff and greater emphasis on payment-reducing modifications – the foreclosure situation will likely get worse before it gets better, according to a new report.
In its fourth report, published in January, the State Foreclosure Prevention Working Group studied data submitted by 13 of the nation's 20 largest subprime servicers through October 2009. What the group found was that servicers are improving their loss mitigation activity, though not in step with the rise in delinquencies.
Since it began collecting servicing data in late 2007, the State Foreclosure Prevention Working Group has observed a significant decline in the ratio of foreclosures-completed to loans-in-the-process-of-foreclosure in the previous month. In its initial February 2008 report, the group determined that about half of all foreclosures-in-process turned into completed foreclosures the following month. The latest report pegs that figure closer to 18%.
‘If this decline were the result of effective loss mitigation efforts, such as loan modifications, it could be interpreted as a positive sign,’ the report says. Other data collected by the group, however, ‘cast doubt on that possibility.’
Similar to the way that fewer foreclosures-in-process have drifted into the ‘completed’ category, the ratio of loss-mitigations-closed to loss-mitigations-in-process in the previous month has dropped off after peaking at 39% in July 2008. In October 2009, the ratio was about 15% – a slight improvement over July 2009's low of 11%. The group notes that this trend could be the result of the federal Home Affordable Modification Program's (HAMP) increased share of loss mitigation activity. Under HAMP, modifications are not categorized as closed loss mitigations until they are converted from trial plans to permanent modifications.
New to the working group's fourth report were data on the number of employees engaged in loss mitigation. According to data reported by the 13 servicers, the number of full-time equivalents (FTEs) assigned to loss mitigation grew from 2,281 in April 2009 to 2,835 in October 2009. Corresponding with this increase was a decrease in the number of case loads per employee. In February 2009, each FTE was working on about 150 cases. The number of loss mitigations in process per FTE stood at 133 in October 2009. Nonetheless, the group notes that the increase in loss mitigation staff ‘has not prevented an increase in the backlog of loss mitigation resolutions.’
Breaking down loss mitigations by type, the working group found that home-retention mitigations – which include forbearances, repayment plans and modifications – made up the majority (and an increasing share) of loss mitigations in process, with modifications, specifically, accounting for 59% of in-process mitigations in the third quarter of 2009.
But when it comes to loss mitigations closed, the number of home-loss mitigations (e.g., deeds-in-lieu and short sales) grew substantially between October 2007 and October 2009. In particular, short sales now make up a larger share of closed loss mitigations, almost tripling, from 4.4% in the fourth quarter of 2007 to 12.5% in the third quarter of 2009.
Judging by the subprime servicers' data, it appears that loan modifications stand far less chance of closing than do other loss mitigations. The ratio of loan-modifications-completed to loan-modifications-in-process in the previous month was 8% in October 2009. (The ratio peaked in July 2008 at 46%.) By comparison, the ratio for all other loss mitigations was 27% in October 2009.
With its first report some two years ago, the working group, which is made up of state banking regulators and attorneys general, became one of the first research groups to highlight the correlation between payment-reducing modifications and redefault risk. Year over year, the percentage of modifications that reduce monthly payments by 10% or more has increased from 57% to 70%.
Again, the group adds a caveat to a seemingly positive finding: More times than not – in almost 72% of cases – borrowers' reduced monthly payments result in an increased unpaid loan balance.
‘In normal times, capitalizing missed payments and servicer fees is a mechanism to reset the clock with a minimal impact on the monthly payment,’ the report states. ‘[H]owever, in this environment with a significant proportion of loans underwater, doing 'business as usual' only adds to the likelihood of ultimate default.’
To the group's apparent surprise, the early-stage performance of loan modifications featuring significant principal reductions (i.e., a greater than 10% decrease in unpaid principal balance) did not represent a drastic improvement over the performance of other modifications.
‘[T]he redefault rates by method of loan modification does appear meaningful, although not as much as the State Working Group expected,’ the report adds. From February 2009 to October 2009, about 40% of all loans modified in the previous 12 months were back into 60-day buckets. Modifications that involved a greater-than-10% reduction in monthly payment carried a redefault rate of 38%.
By comparison, modifications with substantial principal reductions had a 60-day redefault rate of 34% one year after modification.
(Please address all comments regarding this article to John Clapp, editor of Servicing Management, at clappj@sm-online.com.)