Nearly one year ago, the State Foreclosure Prevention Working Group met with the 20
largest servicers of subprime mortgage loans to discuss opportunities to prevent
unnecessary foreclosures. Over the past year, the State Working Group, composed of
state attorneys general and state banking regulators, has collected data monthly from 13
of these 20 servicers and published two reports on subprime servicing performance.
While some progress has been made in preventing foreclosures, the empirical evidence is
profoundly disappointing. Too many homeowners face foreclosure without receiving any
meaningful assistance by their mortgage servicer, a reality that is growing worse rather
than better, as the number of delinquent loans, prime and subprime, increases.
Our report shows servicers have increased their use of loan modifications as a tool to
avoid foreclosure, but in recent months the number of loans on track for a loan
modification has declined precipitously, while the use of short sales has increased.
Servicers appear to have reached the “low hanging fruit” of subprime loans facing
interest rate resets, while not developing effective approaches to address the bulk of
subprime loans which are in default before interest rate resets. The mortgage industry’s
failure to develop systematic approaches to prevent foreclosures has only spurred
declines in property values and further increased expected losses on mortgage loan
portfolios. Based on the rising numbers of delinquent prime loans and projected numbers
of payment option ARM loans facing reset over the next two years, we fear that
continued reactive approaches will lead to another wave of unnecessary and preventable
foreclosures.
Specific Findings:
1. Nearly eight out of ten seriously delinquent homeowners are not on track for
any loss mitigation outcome. In our prior reports, seven out of ten homeowners
were not on track for any loss mitigation outcome. This already disappointing
ratio has become even worse, with 40,000 fewer loans in loss mitigation in May
2008 than in January 2008.
2. New efforts to prevent foreclosures are on the decline, despite a temporary
increase in loan modifications through the 2nd Quarter of 2008. Unlike other
data reports, we track both loan work-outs in process and those that have been
finalized (closed). The number of homeowners working toward a loan
modification has declined by 28% between January and May, falling to a level not
seen since late in 2007. This decline stands in stark contrast to the 51% increase
in loan modifications closed over this same period. This declining trend of new
loans in process suggests that new loan modification approaches have been
tailored to a limited group of homeowners. Instead of expanding loan
modification options to reach a broader set of homeowners, more loss mitigation
is being directed to selling homes short of foreclosure. In January, modifications
in process outnumbered short sales in process by four to one; in May, that ratio
had dropped to two to one.
STATE FORECLOSURE PREVENTION WORKING GROUP Data Report No. 3
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3. We estimate that one out of five loan modifications made in the past year are
currently delinquent. The high number of previously-modified loans currently
delinquent indicates that significant numbers of modifications offered to
homeowners have not been sustainable. Recent reports identify that many loan
modifications are not providing any monthly payment relief to struggling
homeowners. While banks and Wall Street firms continue to report record writedowns
of mortgage loan portfolios and securities, these losses do not appear to be
flowing down to homeowners in the form of sustainable loan modifications. We
are concerned that unrealistic or “band-aid” modifications have only exacerbated
and prolonged the current foreclosure crisis.
4. Three hundred thousand subprime loans are in the process of foreclosure as
of the end of May 2008. Thirty-eight percent (38%) of seriously delinquent
subprime loans are in the process of foreclosure, with over 131,000 foreclosures
completed on subprime loans in May 2008 alone. Delinquency and foreclosure
rates remain high and have a ripple effect through housing, mortgage, and
financial markets.
Given the inability of servicers and investors to adjust their approaches to meet this
unprecedented challenge, the State Working Group continues to see a need for new and
broader-based approaches to loss mitigation that are focused on homeowner
sustainability. One such program is the FDIC’s new approach for addressing
delinquencies in IndyMac’s servicing portfolio.1 We hope other servicers will adopt
similar proactive programs based on systematically revising loans to affordable levels.
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