Loan modifications: still not happening

by Alan White
Hundreds of thousands of homeowners facing foreclosure are calling mortgage servicers in the hopes of negotiating a solution to keep their homes. What happens when they call? The news is not good.

Moody’s rating agency reported in August that only 1% of mortgages facing rate resets and payment shock in 2007 had been modified. In a November update, Moodys now reports that number has increased—to 3%. The survey covered twelve servicers with 60% of the subprime market. Of all subprime mortgages scheduled for an interest rate reset (i.e. a payment increase) in the first eight months of 2007, and not already prepaid, about 50% were current in payments, and the other half were delinquent, in foreclosure, or already foreclosed.

The Moody’s survey confirms that the foreclosure crisis will get worse before it gets better. For one thing, throughout 2007 many borrowers facing reset were still able to refinance or sell their homes, but that exit is rapidly closing. Of all loans due to reset in the first quarter of 2007, 29% were paid off in the six months before the reset, and 13% were paid off after the reset. For resets in August 2007, 21% were paid off in the six months before reset, and only 4% were paid off after the reset. The combined effect of falling home values and the end of subprime lending as we know it will surely shut down prepayments even further in 2008.

The rating agency report expresses concern that servicers do not have the staff and resources to work out defaulted loans on the massive scale that will be required in the coming year. This concern has been expressed elsewhere.

When homeowners do reach the servicer, they are often put on short-term repayment plans, typically calling for increased payments over a short period of time, instead of having their loans permanently modified. The Moody’s survey found that 10% of active loans with 2007 resets were on repayment plans, compared to the 3% that were modified. Servicers are motivated to offer unrealistic repayment plans because A) the plans can mask delinquency rates and make the monthly report numbers look better and B) unlike loan modifications, repayment plans are not restricted or capped by securitization contracts.

The state of Maryland has proposed new rules mandating that servicers report in detail on their foreclosure prevention activities including loan modification statistics. A little sunshine may prod these companies into helping more homeowners. The Moody's study was done before the announcement of the Paulson plan to modify loans a little more systematically. But it will probably take more than public scrutiny and the Paulson plan before subprime servicers will invest the staff, money and time needed to deal with the growing crisis.

UPDATE: Countrywide reported some significant improvement in foreclosure prevention efforts yesterday. The nation’s largest servicer has completed 10,000 loan mods in December compared with 56,000 for the past twelve months. Unlike other servicers, Countrywide clearly prefers permanent modifications over short-term repayment plans. The servicer also announced several partnerships with community and advocacy groups to try to reach even more homeowners.

To put these numbers in perspective, Countrywide was servicing 9 million loans at year-end, of which about 8% were subprime. Of all loans, 7% or 630,000 were delinquent, and an additional 1% or 90,000 were in foreclosure. The delinquency and foreclosure rates for Countrywide's subprime loans at 12/31/07 were about 25% and 5%, respectively.

Comments

[Jeff from Debt Consolidation Loans]

Is there a strategy you would recommend for some wanting to approch their lender for some relief? I'm looking for pros and cons and what not to do.

[C Anderson]

I do loan modifications. I have noticed that since the infusion of the bailout money, there are lenders who were modifying, who are not now. Countrywide and Indymac have shown a notable about face. Where they were working with homeowners, now they have put a stop, most applications are not making it past go...where they were just a month ago.
The only hope is if the investor is Freddie or Fannie.
We need more intervention and less cash going to the banks. They gobbled up little banks and did little to nothing for the homeowners.
If we are to have turnaround, NO MORE MONEY GIVEN TO BANKS. We bailed them out so they can keep forelcosing and getting rid of the bad assets. Keep displacing homeowners, they cannot get work, buy necessities....pretty soon the gangsters.....aka Bankers.....will be foreclosing on themselves.
Time to wake up America, and actually start working together, and stop bailing out. WORK OUT! and WORK TOGETHER. Its a 30 year mortgage.....work out a 5 year plan to recover the loan and let the people have a chance.