Foreclosure Crisis Update

By Alan M. White

Six months ago I reported that mortgage servicers were much more likely to foreclose than to offer loan modifications, based on data from monthly remittance reports to investors. Since then far more data have become available, from reports issued by the Mortgage Bankers Association, the state regulators' foreclosure prevention working group, and the HOPE NOW servicer alliance. I also retrieved some April 2008 remittance reports to update my prior investigation. Although the number of loan modifications rose rapidly in the last six months, the number of foreclosures has risen even faster. While hundreds of thousands have already lost their homes, there are millions in the foreclosure pipeline who could still be helped. What else do the numbers tell us?

First, the crisis continues to deepen. According to HOPE NOW, 547,000 foreclosures were started in the first three months of 2008, and 205,000 foreclosure sales were completed. Those numbers are 14% and 36% higher than in the fourth quarter of 2007. In all likelihood we will see more than 2.5 million foreclosures started this year and more than 1 million homes will be lost (compared with 1.5 million starts and half a million completed foreclosure sales in 2007). The completed sales do not include homeowners who are forced to sell their houses themselves or who simply walk away.

Second, the foreclosure pipeline is clogged and the process is slowing down. This, and the fact that foreclosure filings will remain high for another year or more, means there is still time to help many homeowners. Each month sees more defaults, more foreclosures, and more homes going into the foreclosed inventory (“REO”), so we are not at the peak of the crisis yet. That is expected in late 2008 or early 2009. One telling statistic is the number of mortgages that are more than 90 days delinquent, but NOT in foreclosure. In normal times this number is tiny. It has grown dramatically in all reports I have seen.

Third, the typical foreclosure defendants are living in their home, trying to get through to a servicer, and are either on some sort of repayment plan (or may have a failed plan) or are waiting to hear from their servicer. Only a minority of foreclosures involve investors (18% by MBA’s tally), or homeowners who never made contact with their servicer (23%), two categories that are not mutually exclusive. Therefore, 60%-65% of foreclosures involve owner-occupants who HAVE tried to contact their servicer, at least once.

The state regulators' report says that of the more than 1 million seriously delinquent mortgages in their sample, only about 280,000 were in the loss mitigation process. Even if we subtract the investor and nonresponsive segments identified by MBA, there would be 600,000 homeowners asking for help compared to the 280,000 in the process of getting it. The state regulators also tell us that requests for “loss mitigation”, i.e. some kind of repayment plan or loan modification, outnumber finalized workout plans by 4 to 1. In other words, thousands of homeowners are waiting for a response from their servicer and don’t know where they stand.

The MBA also points to a significant percentage of homeowners who have previously defaulted on a repayment plan (29% of mortgages in foreclosure, also a category that overlaps with investors.) So it is possible that most of those not yet helped according to the states' have failed on at least one prior repayment plan. There are no good data on the comparative success rates of repayment plans and loan modifications.

Fourth, there remains a large gap between homeowners who could benefit from a loan modification, and the number of modifications granted. The state regulators' compilation, with data through January 2008, show no significant increase in loan mods from November 2007 to January 2008 as a percentage of seriously delinquent loans. The number of workouts grew, but only in step with the rise in defaults. In my unscientific sample of four servicers, three did not increase their modification activity between November and April, while the fourth did significantly increased the number of loan mods. On the positive side, the mix of workouts has shifted from short-term repayment plans to more long-term modifications.

What about the rate resets? Most observers agree that they have not been a big factor in foreclosures so far, and the drop in interest rates helps. The 6-month LIBOR rate is now at 2.83%, and the average subprime ARMs margin is 6%, according to the New York Fed's data from LPI. So after resets, subprime loans will be at 8.83%, typically about 1% higher than their initial rate. On the other hand, once rates like LIBOR move back up, more payment shock will be in store in years to come, for homeowners whose mortgages are not modified.

As for the four loan pools I examined last November (serviced by Countrywide, Fremont, Option One and Wells Fargo) only Fremont reports significant numbers of loan modifications for April 2008. Fremont modified 38 mortgages (compared to 30 last November) in its 2006A pool , some with significant interest rate reductions, to as low as 5%. On the other hand, Fremont started 57 new foreclosures and completed 37 foreclosure sales in April, out of 2467 loans, over 1,000 of which are delinquent.

Wells Fargo modified 20 mortgages, compared with 2 in November, in its 2005-1 pool of 2544 mortgages, 700 of which are delinquent. In the same pool, it filed 22 new foreclosures and completed 8 foreclosure sales in April.

Option One modified 8 loans in its ABFC 2005-1 pool, compared to 5 last November. This smaller pool has 1000 loans remaining, 367 of which are delinquent. 19 new foreclosures were filed in April, and 17 foreclosure sales were completed.

Countrywide’s pool (JPMorgan Acquisition Trust 2006-CW2) continued to lag, with only one loan modification reported in April (vs. 4 last November.) This pool of 3800 mortgages has 1200 that are delinquent, and saw 46 new foreclosures in April, as well as 43 completed foreclosure sales. CW is holding 248 foreclosed homes in REO and has a cumulative loss severity of 45% for this pool.

All four loan pools showed increases in loss severity since last November, ranging from 21% for Wells Fargo’s 2005 pool to 52% for Fremont’s 2006 pool. Investors continue to suffer deep losses on completed foreclosure sales, while the servicers uniformly limit their loan modifications to interest rate reductions (none rewrote mortgages to reduce the principal balance, in my tiny sample.) Keep in mind that these data are for single loan pools and may not reflect these servicers' practices generally.

Another note on data: the state task force report covers only 13 servicers, who service primarily subprime loans, and account for only 57% of that market. While subprime mortgages account for about 60% of foreclosures, there are also many prime mortgages in foreclosure. The MBA, state regulator and HOPE NOW data are therefore not directly comparable, and comparisons and extrapolations using data from more than one study will likely produce errors.

Comments

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[Sell My House]

I wonder if the bill that congress is trying to pass will hinder our economy even more. From your article it sounds like we are just headed into the storm of foreclosures we are going to see in the future.

[Foreclosure]

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