Loan modifications performed in 2009 are outperforming modifications executed one year earlier, though the majority of seriously delinquent loans are still not involved in any type of loss mitigation activity, according to a new report from the State Foreclosure Prevention Working Group. The State Working Group, a coalition of state attorneys general and state bank regulators, has been studying servicers' loss mit activity since 2007.
According to the group's fifth foreclosure prevention report, which covers data from nine nonbank servicers, loans modified in 2009 are 40% to 50% less likely to be seriously delinquent six months after modification than loans modified at the same time in 2008. Later-vintage loan modifications, unlike those performed in 2007 and 2008, overwhelmingly included payment reductions.
About 30% of loans modified in August and September 2008 were seriously delinquent after six months as compared to 15.3% of modifications performed in August and September of last year that fell into seriously delinquent buckets after six months.
"The report certainly indicates there are positive developments with regard to loan modifications," says Neil Milner, president and CEO of the Conference of State Bank Supervisors, a member organization of the State Working Group. "However, there is still a tremendous amount of work to be done to prevent unnecessary foreclosures. Servicers must continue to perform meaningful outreach to those homeowners who are seriously delinquent and to perform modifications with significant principal reduction."
The State Working Group finds that 62% of borrowers whose loans are 60+ days delinquent are not involved in any form of loss mitigation efforts. The group says the biggest failure of foreclosure prevention programs is servicers' inability to ‘engage homeowners in meaningful loss mitigation efforts in the first instance.’
The factors behind the low levels of engagement include inconsistent and unclear messages to borrowers about loss mitigation options, a lack of transparency in the loss mitigation process, poor customer service and long delays associated with the modification process, the group says.
The State Working Group says it remains concerned over the absence of modifications that reduce outstanding loan balances. In the first quarter, 13.7% of all modifications reported to the group involved principal reductions larger than 10%. More than 70% of modifications increased the unpaid principal balance.
‘With home-price declines of 30 percent since 2006 and almost 25 percent of all homeowners with a mortgage owing more than their home is worth, the failure to meaningfully reduce principal limits the success of current foreclosure prevention efforts,’ the report says.
The group notes that a principal-reduction program has been incorporated into the Home Affordable Modification Program but says the optional nature of the subprogram and its inapplicability to Fannie Mae and Freddie Mac loans will significantly limit its impact.
