Foreclosure Reduction Effort Yielding Mixed Results, Report Says
Tuesday, December 9, 2008
A new government report released yesterday underscored the limited success of industry efforts to reduce foreclosures by modifying mortgage loans, offering fuel for both sides in the debate over whether modification efforts should be redoubled or abandoned.
Mortgage companies modified loan terms during the first half of 2008 for more than 200,000 borrowers who had struggled to make their monthly payments. The majority of those borrowers have since missed at least one more payment, putting them at renewed risk of foreclosure, according to the report from the Office of the Comptroller of the Currency.
The findings were described in a speech yesterday by John Dugan, the comptroller of the currency, who said the high re-default rate was "surprising, and not in a good way." But he said it was not possible to determine from the available data to what extent the borrowers were beyond help and to what extent mortgage companies were not trying hard enough to offer effective assistance.
Lenders use the term loan modification to describe a wide range of possible actions. Some borrowers were granted lower monthly payments, while others got a second chance to make the existing payment, or sometimes an even higher payment including penalty fees. The OCC did not report separate redefault rates for each of these kinds of modifications.
"I don't think it tells you that all mortgage modifications are bad," Dugan said. Rather, he said, more data was needed to evaluate what kinds of modifications are most successful.
There has been little data until now on the success of efforts to modify mortgage loans, even as policymakers debate whether the federal government should fund modifications for millions of borrowers facing foreclosure. Credit Suisse estimates that lenders will foreclose on 8 million homeowners over the next four years.
The Federal Deposit Insurance Corp. has championed a proposal to reduce the interest rates on several million loans by promising lenders that the government will cover part of any losses. The agency estimates the plan could prevent 1.5 million foreclosures, at a cost of more than $20 billion. Other parts of the government, including the Federal Reserve, favor modifications that would reduce the principal owed by the borrower.
Still others, including John Reich, director of the Office of Thrift Supervision, said the government should spend its money stimulating the economy rather than modifying mortgage loans because modifications won't have the desired effect as long as home prices are falling and unemployment is rising.
Dugan described the OCC's findings while speaking on a panel yesterday with senior officials from each of those agencies.
The OCC found that 58 percent of borrowers who received a modification in the first quarter have since missed at least one monthly payment. In the more recent group of borrowers who received modifications in the second quarter, 51 percent have missed a payment. The finding was based on data provided to the OCC and its sister regulator, the OTS, by 14 of the nation's largest banks, which account for about 60 percent of the mortgage market.
Experts said the data painted an overly bleak picture because it obscured differences between types of modifications.
A recent study by Credit Suisse of loan modifications during the first quarter of the year found that in cases when the monthly payment was reduced, only about 23 percent of borrowers had since missed at least two monthly payments. In cases where the lender offered a second chance, but not a lower payment, the redefault rate was about 40 percent, according to Rod Dubitsky, the firm's head of asset-backed securities research. Credit Suisse excluded cases where the borrower had missed only one monthly payment.
The OCC's findings are "indicative of the fact that modifications made in the past year have not been sufficiently aggressive," said Alan White, an assistant professor at Valparaiso University School of Law in Indiana, who has studied the mortgage crisis.