Green Shoots? Maybe a Glimmer in 1st Quarter Modification Efforts

The OCC and OTS Mortgage Metrics Report for the 1st Quarter of 2009 shows some glimmers of hope in the modifications efforts by the nation's largest banks. The bad news? Previous efforts set the bar for improvement pretty low.


The OCC and OTS Mortgage Metrics Report for the 1st Quarter of 2009 shows some glimmers of hope in the modifications efforts by the nations largest banks although progress is still slower than necessary to stop the rising tide of foreclosures. While the absolute number of people in need is continuing to increase, banks (and their servicers) are more likely to offer a modification (rather than a payment plan), those modifications are more likely to lower a borrowers payments, and the re-default rates are slowing slightly.

The bad news? The baseline set by previous modifications activities by the institutions covered in the OCC/OTS report sets the bar pretty low for improvement efforts.

The most recent quarterly report digs even deeper into modification efforts and results than the previous version. The full report runs 42 pages so I cannot cover everything here, but here are some highlights.

The original 13 banks and thrifts covered by this report are now consolidated into nine bank holding companies. These institutions hold 64 percent of all 1st mortgages outstanding in the United States. The report acknowledges that “the characteristics of these loans differ in notable ways from the overall population of mortgages” but does not elaborate on these differences.

More than 91 percent of this portfolio is serviced by 3rd parties due to the high rate of securitization by these institutions. Much has been written about the affect of servicing agreements on the rate of modifications, since contractually, servicers are hindered by complicated agreements restricting their decision-making. This looks to be changing. Home retention efforts during the first 3 months of 2009 increased almost 14 percent over the prior quarter, and exceeded newly initiated foreclosures by almost 16 percent.

Home Retention Efforts v. Foreclosures

Types of Home Retention Efforts

The number of modifications (a contractual change in the loan) versus payment plans (attempts to bring borrowers current) is increasing. In the 1st quarter of 2008, less than 34 percent of home retention efforts were modifications; in the 1st quarter of 2009, almost 55 percent were.

Types of Home Retention Efforts

In addition, the percent of modifications that actually lower a borrower’s payments is improving. In the 1st quarter of 2009, over 54 percent of modifications adjusted a borrower’s payments downward compared to only 34 percent in the 1st quarter of 2008. This quarter’s report also included a new tier in reporting, looking at modifications that decreased borrower’s payments by more than 20 percent.

Loan Modifications by Payment Adjustment 

I started a review of the 4Q 2008 report with the disturbing news that modification efforts in each subsequent quarter were less successful than the prior ones, as measured by redefault rates. Initial indicators are better on the success of these efforts but the report notes that it is too early to tell if this is going to be a trend. Loans modified in the last quarter of 2008 are redefaulting at a slightly lower rate than in the prior one, although still faster than the 1st and 2nd quarters of 2008.

 Modified Loans 60+ Days Delinquent  

Types of Modifications

For the first time, the OCC/OTS report collected data on the types of modifications being granted to borrowers. They looked at the data for all modifications as a whole, and also evaluated the concessions by risk category (prime, subprime, etc) and by investor (Fannie, Freddie, Ginnie, Portfolio, etc.).

Two-thirds of modifications were “combination modifications”, contractually changing at least two features of the loan.  Capitalization of missed payments and fees (70.2 percent) and rate reductions (63.2 percent) were the two most common changes, followed by term extensions (25.1 percent) and rate reductions (12.6 percent).

Loan Features Modified

Looking at the entire portfolio covered in this report shows that very few modifications included principal reductions (1.8 percent) or principal deferral (1.1 percent). However, when the data is broken down by investor, you see that all of the principal reductions were done by institutions that were holding loans in their portfolio. Loans held by Fannie, Freddie, Ginnie, and private investors did not lower the principal.

Prime Loan Trends

The prime portfolio saw the greatest increase in seriously delinquent mortgages, defined in this report as loans 60 or more days past due or loans to borrowers in bankruptcy. While the percent of the portfolio is still low (2.9 percent) compared to other risk categories, the total number of these loans now represents 40 percent of all seriously delinquent loans.

Number of Seriously Delinquent 1st Mortgages by Risk Category 

However, prime borrowers are much more likely to turn to short sales or deed-in-lieu-of foreclosure actions than other risk categories. With prime borrowers representing almost 58 percent of these actions, this risk class of borrower is disproportionately represented in the total. Since these actions affect one’s credit rating less than a foreclosure, this lends more evidence to the axiom that those that know the least, pay the most.

Download a full copy of the report here.