Three quarters of seriously delinquent subprime borrowers were not headed for any loss mitigation outcome other than foreclosure at the end of January, state banking regulators and attorneys general said in a report that analyzes the lending industry’s loss mitigation efforts.

In their second look at how often subprime loan servicers are able to engage in workouts, loan modifications, short sales and other loss mitigation techniques, the State Foreclosure Prevention Working Group found that the percentage of troubled borrowers diverted from the foreclosure process — about 25 percent — remained essentially unchanged from last fall.

While the number of borrowers engaged in some sort of loss mitigation increased, the number of delinquent loans was also up, leaving the relative percentage of borrowers getting help at about the same level as in October, the Working Group said.

The study, Analysis of Subprime Mortgage Servicing Performance, calls into question the lending industry’s claims that efforts to reach out to troubled borrowers are working.

The HOPE NOW alliance of loan servicers, who handle about two-thirds of mortgage loans, this month announced they’d achieved 309,700 prime and subprime loan workouts in January and February, bringing the total number of workouts reached since July to nearly 1.2 million.

HOPE NOW Executive Director Faith Schwartz noted that declining short-term interest rates have reduced the payment shock for many adjustable-rate mortgage (ARM) borrowers, meaning fewer require loan modifications to avoid unaffordable resets.

Of the 140,562 subprime 2/27 and 2/28 hybrid ARM loans scheduled to reset in January and February, about 43 percent were paid in full through refinancing or sale, and the terms of another 4 percent were modified to help borrowers stay current, HOPE NOW reported. All told, among loans that were current at reset, only 60 had entered the foreclosure process, the alliance reported.

Iowa Attorney General Tom Miller, a founder of the State Foreclosure Prevention Working Group, said in a statement accompanying the release of the group’s new report that progress is being made, but there is a long way to go.

"We still see a tremendous gap between the need for loan workouts and the options in place today," Miller said.

The Working Group repeated its calls for loan servicers and investors to develop a more systematic approach to conducting workouts. The labor-intensive, hands-on methods used today result in many unnecessary foreclosures, the group said.

Most loss mitigation efforts do not close quickly, the report noted, and the trend over the three months covered in the latest study — November, December and January — suggests that many attempts at loss mitigation fail to close at all.

"Based on anecdotal reports of lost paperwork and busy call centers, we are concerned that servicers overall are not able to manage the sheer numbers of delinquent loans," the report said.

Delinquent loans that do not receive loss mitigation may be clogging up the system on their way to foreclosure, which could translate into increased levels of vacant foreclosed homes that will further depress property values and increase burdens on government services, the report concluded.

Slowing down the foreclosure process would allow for more workouts, the Working Group said, noting many states have enacted or are considering measures that will lengthen the foreclosure process.

The lending industry has made efforts to streamline loan modifications and slow down the foreclosure process, but the report concludes they do not go far enough.

Last year, the American Securitization Forum issued guidelines for fast-tracking refinancings or loan modifications on ARM loans that are scheduled to reset. HOPE NOW loan servicers in February announced an initiative, Project Lifeline, which puts foreclosure proceedings on hold for up to 30 days to evaluate alternatives.

Loss mitigation on loans delinquent 60 days or more

Loss Mitigation Efforts

Jan 2008

Oct 2007

Total in process with borrower losing home



Total in process of home retention



Total in process of being resolved by borrower



Total loans in loss mitigation



Source: State Foreclosure Prevention Working Group


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