OCC/OTS: Mods That Lower Payments Have Better Redefault Rates

Posted by Orb Staff on April 03, 2009 No Comments
Categories : Mortgage Servicing

Credit quality continued to decline in the fourth quarter of 2008, as just under 90% of mortgages were performing at year-end, compared with 93% at the end of September 2008, according to the latest Mortgage Metrics Report from bank regulators.

The report, published by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS), covers first-lien mortgages serviced by nine large banks and four thrifts, constituting approximately two-thirds of all outstanding mortgages in the nation.

This decline in credit quality was evident in all loan risk categories, with subprime mortgages showing the highest level of serious delinquencies. However, the biggest percentage jump was in prime mortgages, the lowest loan risk category and one that accounts for nearly two-thirds of all mortgages serviced by the reporting institutions. At the end of the fourth quarter, 2.4% of prime mortgages were seriously delinquent, more than double the 1.1% recorded at the end of March 2008.

Home retention actions – loan modifications and payment plans – increased by more than 11% in the fourth quarter. Although the number of modifications increased in the fourth quarter, they declined as a percentage of all new home retention actions, from 52% in the second quarter to 43% in the third quarter and 40% in the fourth quarter. This declining percentage may have resulted from the growing prevalence of "trial" modifications reported as payment plans, the regulators say.

Consistent with last quarter's findings, the report also showed that redefault rates on modified mortgages were both high and rising during the first three quarters of 2008, with loans modified in the third quarter showing the highest redefault rates.

Redefault rates were consistently lower, however, for modifications that resulted in lower monthly payments, according to the report. When modifications decreased monthly payments by more than 10%, only about 23% of the loans became seriously delinquent six months later. By contrast, 51% of the loans in which payments remained unchanged were seriously delinquent after six months. The comparable number for loan modifications in which payments increased was 46%.

SOURCES: OCC, OTS

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