More than three out of four loan modifications made by lenders during the second quarter reduced borrowers’ monthly payments, up from 54 percent in the first three months of the year, according to a report released today by federal bank regulators.
That’s welcome news, because loan modifications that reduce borrowers’ monthly payments are less likely to redefault, the report from the U.S. Office of the Comptroller of the Currency and the Office of Thrift Supervision said.
The report also showed lenders were much more willing to engage in short sales than they were a year ago, which helped limit annual growth in the number of homes completing the foreclosure process.
Newly initiated loan modifications and repayment plans (439,574) outnumbered newly initiated foreclosures (369,226) during the second quarter. Foreclosure starts were up 28 percent from a year ago, but loan modifications and repayment plans were up more sharply — 74.8 percent.
The number of homes in the foreclosure process — 992,554 — was up 15.3 percent from the first quarter and 79.4 percent from a year ago. The actual number of homes in foreclosure is even higher, since the report only captures about two-thirds of outstanding first lien residential mortgages.
Completed foreclosures and other home forfeitures, including short sales and deeds in lieu of foreclosure, totalled 130,141, up 19.4 percent from quarter to quarter and 2 percent from a year ago.
Short sales were a bigger part of that mix, rising 34.8 percent from the first quarter to the second, and 146 percent from a year ago, to 23,102. By comparison, completed foreclosures rose by 16.9 percent from quarter to quarter but were down 9.6 percent from a year ago, to 106,007.
Loan modifications — which are considered more likely to succeed than repayment plans that don’t change a loan’s terms — accounted for only 32 percent of the 439,574 "home retention actions" undertaken by lenders during the second quarter, down from 50 percent a year ago.
But that’s only because the 114,538 trial loan modifications made during the quarter under the Obama administration’s "Making Home Affordable" program are being classified as repayment plans until borrowers demonstrate they can make their payments for three months and are converted to permanent loan modifications.
Taken together, Home Affordable trial modifications and loan modifications made outside of the program constituted 58 percent of all lender home-retention actions during the second quarter.
Redefaults tied to payment reductions
Previous reports in the series from the OCC and OTS have shown that most delinquent borrowers who are granted a loan modification of repayment plan eventually redefault.
The latest report shows redefaults continue to undermine foreclosure-prevention efforts. But more lenders are offering loan modifications that reduce a borrower’s monthly payments and increasing the size of that reduction, which is expected to reduce future redefaults. …CONTINUED
Nearly two-thirds of borrowers whose monthly payments remained unchanged after a loan modification had redefaulted within nine months, the report said.
A reduction in a borrowers’ monthly payment of less than 10 percent cut the redefault rate to 45.4 percent after nine months. Nearly two-thirds of borrowers who received loan modifications that reduced their payments by 10-20 percent were still current after nine months, and nearly 70 percent of those whose payments decreased by 20 percent or more were still making payments after that time, the report said.
Many borrowers with adjustable-rate mortgage (ARM) loans have seen little or no reduction in their monthly payments from a loan modification. In the past, loan servicers might simply freeze the interest rate on an ARM loan before it resets to higher payments, without a full assessment of the borrowers’ capacity to continue making their current payment, the report said.
That appears to be changing, as only 4.3 percent of loan modifications made in the second quarter left monthly payments unchanged, down from 28.4 percent in the first three months of the year — a decline of almost 85 percent.
The percentage of loan modifications and repayment plans that reduced borrowers’ monthly payments by 20 percent or more increased to 38.6 percent, up from 28.8 percent in the first quarter.
Interest-rate reductions and capitalization of missed payments and fees were the most common features of loan modifications, with 70.1 percent of all modifications involving rate reductions, up from 55.4 percent in the first quarter.
The percentage of loan modifications that involved principal reductions — which increase a borrowers’ equity and may reduce the likelihood they will walk away from a home — grew from 3.1 percent in the first quarter to 10 percent.
A loan modification may also increase monthly payments, if a lender allows the interest rate on an ARM loan that is about to reset to increase by less than required in the original mortgage contract.
While 17.4 percent of loan modifications made in the second quarter actually increased borrowers’ monthly payments, that’s down from 18.1 percent in the previous quarter and 32.7 percent from a year ago.
The report showed 15.2 percent of the more than 900,000 pay-option ARM loans tracked by the study were seriously delinquent, compared with 5.3 percent of all mortgages. One in 10 homes purchased with pay-option ARM loans were in the process of foreclosure, about triple the 2.9 percent rate for all mortgages.
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