Aid to Borrowers Not Preventing Rising Delinquency
Saturday, April 4, 2009
Mortgage lenders have boosted their foreclosure-prevention efforts, but homeowners nonetheless are increasingly falling into delinquency even after receiving help on their loans, according to a government report issued yesterday.
The report, by the Office of Thrift Supervision and the Office of the Comptroller of the Currency, which regulate mortgage lenders, illustrates the challenges facing industry and government efforts to tackle the foreclosure crisis. Foreclosure rates are expected to continue to increase as the economy falters and the labor market weakens. It could take months for the Obama administration's prescription for the foreclosure crisis to begin to have an impact.
The financial services industry has been increasingly focused on finding affordable mortgage levels for troubled homeowners, said Faith Schwartz, executive director of the Hope Now Alliance, a group of mortgage lenders. "Our members are reporting to us that they have been increasingly using loan modifications during 2009," she said in a statement.
According to the report, a growing number of homeowners are falling behind on their payments and borrowers with prime mortgages, which traditionally are considered less risky, are a growing part of the problem. The number of prime loans that were seriously delinquent -- the borrower having missed two or more payments -- exceeded seriously delinquent subprime loans for the first time in the fourth quarter, the report said.
The report also found that many borrowers are quickly falling behind on their payments after receiving a modified loan, which can include lowering their interest rate or extending the length of the loan. Of the borrowers who had loans modified early last year, for example, about 35 percent had missed at least three payments within nine months and about 57 percent had missed at least one payment.
"These lenders blame the homeowner for being late in the first place, and now they are blaming them for defaulting on the modification, when in both cases the payments were unaffordable," said Bruce Marks, chief executive of the Neighborhood Assistance Corp. of America, which has been critical of industry foreclosure-prevention efforts.
The more a borrower's payment is lowered, the more likely he or she is to stay current on the loan, the report found. But during the fourth quarter, most borrowers with modifications, about 58 percent, did not end up with lower monthly payments.
"I am like everybody else -- I want to be a optimistic. But studies like this don't promote optimism," said John Taylor, president of the National Community Reinvestment Coalition. "The re-default rates of these modifications show they are not effective enough."
Also, an increasing proportion of homeowners, about 1.44 percent during the fourth quarter of 2008, are falling behind before making a single payment on their mortgages, according to the report.
The increase could be a sign of fraud, that the loans weren't reviewed properly at the outset, or of the worsening economy, said John C. Dugan, comptroller of the currency. "Circumstances have changed more quickly for some borrowers, and they have not been able to make payments they thought they could," Dugan said.
A recent Washington Post investigation of loans backed by the Federal Housing Administration found that in the past year, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages nearly tripled. Some of the loans in yesterday's report are FHA-backed.