In early April, the OCC & OTS released their 4th Quarter 2008 Mortgage Metrics Report. In addition to looking at overall “home retention efforts,” the report tracked re-default rates by type of loan modification for the first time.
First, and most troubling: re-default rates for loans modified in each subsequent quarter are worsening. Using a 60+ day delinquency standard, loans modified in the first quarter of 2008 are re-defaulting at a rate of 31.4% (at 5 months) compared to 43.0% of loans modified in the third quarter. And the data gets worse the farther out from the original loan modification as evidenced in the graph below.
Source: OCC and OTS Mortgage Metrics Report 4th Quarter 2008
While these troubling rates can be partially attributed to an economy that has continued to deteriorate during 2008, responsibility also sits with the banks for the format of the loan modifications they undertook. In response, the OCC and OTS added a new metric to the 4th Quarter report: changes in monthly payment for loan modifications.
They asked the 13 reporting institutions (9 banks, 4 thrifts) to classify their loan modifications in one of four categories:
- reduced monthly payments by more than 10 percent
- reduced monthly payments by 10 percent or less
- left monthly payments unchanged
- increased monthly payments.
The results can hardly be considered surprising: loans in which the monthly payments were lowered by at least 10% had the lowest re-default rates. However, only 38.4% of loans modified in the third quarter lowered the borrowers monthly payment. Data for the fourth quarter is better but still troubling: 49.5% of loan modifications fell in the first two categories.
You may be scratching your head trying to figure out how a loan modification can result in a higher monthly payment. It’s not entirely illogical. In good economic times, when a person loses their job, they may just need a month or two to get back on their feet. In that situation, allowing a borrower to simply skip a payment or two and spread those fees (with interest) out over time or bring the loan current by adding the missed payments to the remaining time period. These measures often result in a higher monthly payment as soon as the temporary modification period is over.
However, the current recession is having a much longer, deeper impact on borrowers and this philosophy simply is not working. In addition, plummeting home values are providing new incentives for borrowers to simply walk away rather than fight for their home. One credit union we talked to said they had a borrower walk out of a loan modification negotiation when they discovered that the re-appraised value of their home was significantly below their mortgage balance. The credit union learned quickly not to disclose the home appraisal values.
What other tips do your credit union colleagues have to offer? We interviewed a number of mortgage executives at credit unions across the country for an upcoming CUtv event we’re hosting on May 6th. Here are 6 tips they’ve offered so far:
- The key question is: how badly does the member want to remain in their home? If they’ve mentally given up, they’re more likely to walk away, especially when confronted with the stark reality of “being underwater.” This is a hard conversation to have, but a necessary one.
- Get out of the “contract” mindset. There are no rules anymore. Members can walk away leaving you with nothing except the keys to the house. Find a way to work together on a solution that is in everyone’s best interest.
- Do not look for a quick fix. Even though a member may ask for temporary assistance, consider the realistic, longer term outlook for their financial future and plan for that.
- There is a philosophical difference between credit unions and the regulators, who only want you to work with people “willing and able”. Unemployment usually means “unable” in very short term but these members are still in need. Reserve well for losses but stick to your guns.
- Consider housing the loan modification team on the “sales side” of the credit union, not in collections. Members need to feel less threatened to talk and you’ll need to work with them closely to come up with a solution that works for both parties. Hire the right people, before you think you may need them.
- Understand both tracking and reporting. Accounting for Troubled Debt Restructures (TDRs) is a new field for many credit unions facing serious mortgage delinquencies for the first time. Tracking the success of your loan modification program will be a manual process—consider early what data you will need to measure the success of the program (the OCC/OTS decision to track monthly loan payments 12-months in to their reporting efforts is just one example).