Mortgage Modifications: More Data

By Alan White

As often happens when writing about the foreclosure crisis, my last comment on foreclosures and loan modifications was obsolete almost as soon as I posted it. Today the Mortgage Bankers Association released a thorough study of foreclosures, loan modifications and repayment plans. The MBA study found that the number of repayment plans, and to a lesser extent loan modifications, was significant in relation to the new foreclosures started during the third quarter of 2007. The basic finding was that in that three-month period, mortgage servicers worked out 183,000 repayment plans and 54,000 loan modifications, while starting 384,000 new foreclosures. The foreclosure filings are further broken down based on whether the property was investor-owned, the subject of a previous broken payment plan, or the homeowner could not be reached by the servicer. Those three categories accounted for 235,000 of the 384,000 foreclosures.

These data reveal both good news and bad news. The scale of the servicer effort is starting to show. On the other hand, the overreliance on payment plans, especially for subprime adjustable-rate mortgages, is troubling. Strangely, repayment plans outnumbered loan mods 8 to 1 for subprime ARMs, compared with three to one for all mortgages. The mortgages most in need of modifications are being modified the least.

Nationally, 40% of the foreclosures started on subprime ARMs involved a failed repayment plan. Typical repayment plans require homeowners to make increased monthly payments to cure their arrears, and do nothing about payment shock caused by rate resets. It is understandable that these payment plans would fail to solve the long-term problem. Nevertheless, the evidence that servicers are starting to modify loans on a broader scale is welcome for homeowners in trouble, and suggests that calling their servicer now might yield better results than it would have six months or a year ago (assuming the caller can get through.)

Comments

[Adam Levitin]

There's something disingenuous about calling a deed in lieu an improvement on a foreclosure. If anything, the borrower typically keeps the house longer in the foreclosure situation, and I doubt they have much difference in terms of credit-score effect. Same for counting short-sales as improvements. Lenders like short sales because no REO, but the borrower gets the forgiven debt imputed as income.