Mortgage Modifications not Happening

By Alan White

Consumer advocates, state and federal regulators and politicians are calling on subprime mortgage servicers to modify loan terms to stem the rising tide of home foreclosures. Lenders are promising hotlines but what happens when homeowners call servicers? Are the servicers modifying loan terms? Unfortunately servicers are not making this information public, at least in an accessible way. Monthly reports to investors, however, do include some data on loan modifications. I decided to try tabulating numbers from some of the November monthly remittance reports to see what the servicers are doing. These reports cover only the loans in a particular pool, usually two to ten thousand mortgages from a single month or quarter. It seemed logical to start with groups of mortgages originated in the last two years, since most subprime mortgages (60% to 80%) are 2/28 ARM’s, with big payment increases after two years. I gathered the November remittance reports for five leading servicers to see what they were doing. The results are discouraging.

Countrywide loan pool 2006-2 (JPMorgan Mortgage Acquisition Corp 2006-CW2) as of November 2007 had 4,123 mortgages remaining in the pool. 980 are delinquent, in foreclosure, bankruptcy or REO (real estate owned, meaning foreclosed homes not sold yet). Countrywide started 38 new foreclosures last month and completed foreclosure sales of 22 homes. Investors were hit with $2.7 million in losses on 57 loans from REO sales or write-offs, an average loss severity of about 45%.

So what about modifications? There were four. Three of the mods did not involve any reduction of interest or monthly payment. These were probably reamortizing delinquent payments. CW also repurchased one loan, which may have been a modification, or some other problem.

They are willing to sustain losses of about $48,000 per loan but not to reduce anyone’s monthly payment to save a home. Surely some of the 900 mortgages are occupied by homeowners who could make reduced payments, that would leave CW and its investors losing less than 45% of the loan value.

What about other servicers? Well, Fremont did a little better. For its 2006-1 pool, there were about 790 loans out of 2750 delinquent, in foreclosure or bankruptcy, and they modified 32 last month. Meanwhile 67 foreclosures were started and 77 were completed or liquidated. To consider the costs and benefits, I looked at the dollar losses from completed foreclosures, on the one hand, and the lost income from modifying loans on the other hand. The average loan with a loss cost investors $35,000. The average modified loan had a $235 monthly payment reduction. Assuming five more years of payments discounted to present value at 6%, that represents about $3,800 per modified loan in foregone income. Even if some modified loans end up defaulting later, it is hard to understand why more modifications aren’t being offered.

Option One reports modifying five loans out of 343 delinquent (1,118 total remaining) mortgages in the ABFC2005-1 pool. Two of the five mods involved a payment reduction. Most of these loans are at or past their rate reset dates. Also last month, 36 foreclosures were started, 22 loans were liquidated or sold at a loss totaling $637,000. Ten foreclosed properties went into REO.

Wells Fargo's 2005-1 pool, originally 7500, now 2800 loans, had 638 delinquent loans (not counting REO), of which 215 are in foreclosure or bankruptcy. Two mortgages were modified in November, another two in October. In those two months 87 new foreclosures started, 71 mortgages had realized losses of about $400,000 total, and 27 homes moved into REO, i.e. had foreclosure sales or were surrendered by homeowners.

Some of the other top servicers’ reports showed no modifications, but that may be because the reporting of modifications is a relatively new feature and they are not tabulating them yet. Based on this limited sample, the ratio of loan modifications to foreclosures and sales is dismal. Investors are taking big losses on completed foreclosures, while apparently being unwilling to forego a little bit of interest to keep families in their homes.

The state attorneys general have proposed a new type of call report for servicers to report their foreclosure prevention activities. There is a critical need for more information on the successes and failures of loss mitigation efforts, not only for investors, but for all of us who care about the millions of Americans facing the loss of their homes.

Comments

[John]

Besides missing the first mortgage payment that leads to the foreclosure process, the most important event during foreclosure is the sheriff sale of the property. This is the event that will effectively transfer ownership of the house from the current owners to whomever wins the auction (usually the foreclosing bank). Many homeowners are able to postpone a sheriff sale if they are working on an option to save the home, but stopping the auction numerous times may be more difficult. The homeowners, though, should take every opportunity to gain more time, even if they have realistic chance to prevent the foreclosure from taking their homes.
http://www.thejohnbeck.tv

[Todd B.]

I just posted a similar blog on pissedconsumer.com
As a MM Consultant, (at the MM Center) we hear failing modification stories everyday! It makes me sick alot of people are getting kicked to the street and that is why I chose to consult and help hurting homeowner’s through this difficult process. The thing that the homeowner doesn’t understand is that when you negotiate a mortgage modification with your current lender, most of the time you are negotiating with an entry level employee or you might get a manager. We at the MM Center have developed relationships with key decision makers at most all of the banks and financial institutions through out the nation. We go right to that key person, (by contacting them on their direct, private line) and we know ahead of time what they are looking for to modify your loan. We have over an 85% success rate of modifying your loan. It doesn’t cost you anything to get pre-qualified and we will let you know within a 24 hour period. We are an honest, ethical company and our top priority is your interest, PERIOD! You need to hire an incorruptible, licensed consultant with many years in the mortgage / finance business. Think of when you purchased your home, did you secure the mortgage all by yourself? If you have any questions, I would be more than happy to assist. Toll FREE @ 866-780-5901

[Doug Smith]

The key is the lender will do everything they can to avoid foreclosure, so this is the house owners main point of leverage. With some good communication ofen payments can be reduced and the owner can maintain the house.

[Bill George]

All of the terms and conditions of mortgage modification programs which I have read about put the borrower in the position of a renter rather than a true equity holder. Adding years to the pay-down of the mortgage and mandating requirements for splitting equity accretion with mortgage lenders, if the home price recovers dramatically in the first few years after the modification, are disincentives for accepting a modification and / or maintaining or improving a property subject to such mortgage modification terms. This could have a negative effect on the quality of the housing stock and create more costs for mortgage lenders when the properties eventually become uninhabitable and are abandoned. To a significant degree the mortgage bubble made homes in desirable areas unaffordable for first time home buyers, honest borrowers, economic realists and those people who did not want to become a slave to a mortgage payment. It seems mortgage modification and mortgage restructuring will slow down the re-pricing process necessary to make homes affordable for people who earn (and can document) something close to an average income. I believe areas like California will experience a net loss of lower and middle income potential homeowners, as a result unsustainably high home prices and higher taxes caused by the loss of tax revenue resulting from the mortgage-mess recession.

Another reasonable question, will the borrower in the mortgage modification get full value of the larger mortgage interest income tax deduction created by the modification? It seems unfair for a borrower who is getting taxpayer assistance (through the mortgage bail-out) to also get a tax break as a result of their poor financial planning.