LPS: Mods Pay Off, Prime Delinquencies Rise

Lender Processing Services data show improved cure rates of seriously delinquent loans are balancing out the reverse effect of loan process reviews that brought many foreclosures back to a seriously delinquent status.

According to the LPS Mortgage Monitor, by February 22% of loans that were 90 days or more delinquent 12 months ago are now current, up from only 10% year-over-year in January.

The fact that an additional 600,000 of these seriously delinquent loans are now current, said Herb Blecher, vice president, LPS Applied Analytics, during a press conference, paints a different view of the effect of foreclosure prevention efforts initiated by banks. It differs from the widespread perception that there is not enough loan modification activity.

However, the success of a modification is determined by its sustainability in the long term rather than in the short term.  Blecher agrees that said improvements “do not necessarily speak” for the long term.

One reason is the fact that while loan modification efforts “have begun to pay off” foreclosure timelines continue to extend. The average U.S. loan in foreclosure has been delinquent for 537 days and 30% of loans in foreclosure have not made a payment in over two years.

Plus, however positive, the reduction in the number of seriously delinquent loans is less significant on a month-by-month basis. During the month the number of loans 90 days or more delinquent dropped 0.1% to 8.24%—indicating the decrease was consistent with an equally small decline in overall delinquencies from 8.9% in January to 8.8% in February.

In the past few months, process reviews have had a significant impact on the distressed housing market, while limited foreclosure sales keep inventory levels up, Blecher said. The most positive monthly activity was the 11.3% drop in foreclosure starts, which coupled with the improvements in new seriously delinquent rates and cure rates helped release some of the delinquency pressure on banks in February.
By comparison, in January the decrease in delinquencies was credited mostly to the process reviews that transitioned many foreclosures back to the seriously delinquent status.

LPS data showed that in December 2010 the number of seriously delinquent loans increased for the first time since May 2010, marking an overall growth featuring the largest increase in the over 12-month delinquent category as more loans were removed from foreclosure.

As of Jan. 31, 2011 over 2.2 million loans were 90 days or more delinquent but not yet in foreclosure bringing the total number of loans in some stage of delinquency or foreclosure to 6.9 million.

Meanwhile, at 4.15% the foreclosure inventory rate remained almost the same during this year’s first two months, but since the number of foreclosure sales remains very low, it will keep that upward pressure on, Blecher said.

The foreclosure inventory is over 30 times higher than the monthly foreclosure sales volume. Consequently these foreclosures that may ultimately enter the market as bank-owned properties, will continue to pressure down home values.

So the overall relative stability seen during the past six months may not be sustainable in the near future, he said.

LPS said delinquencies still remain at about twice the 1995-2005 average, with foreclosure inventories remaining at 7.8 times the “historical norms.”

The February LPS Mortgage Monitor report findings are bittersweet as the consistent loan delinquency rate decline is counterbalanced by the backlog of foreclosures at every level, which “will continue for quite some time.”

Another surprise finding is that prime loan performance is deteriorating. A loan-level analysis shows that contrary to popular belief subprime products are not the primary drivers of foreclosures.

February's data show a 23% increase in Option ARM foreclosures over the last six months, which represents 18.8% of all loans in absolute numbers—surpassing the rate of all other product types including subprime foreclosures at 14.5%.

In addition, it remains to be seen whether signs of deterioration in the performance of prime loans will continue going forward.

Nonagency prime conforming loans and jumbo loans were the only loan types that showed increases in both delinquencies and foreclosures reaching 7% and 7.5% delinquent and 4.1% and 3.8% foreclosure rates.