April Report: Modified Loan Performance Improves, Delinquencies Increase

Monthly reports showing more stable loan modification performance patterns and new delinquency rates indicate the mortgage servicing market is becoming more predictable.

Stable trends in recidivism, or redefaults on loan modifications, are “particularly” encouraging because they indicate long-term sustainability, according to Hope Now data from May 2010 to April 2011.

Hope Now executive director Faith Schwartz said findings showing that permanent proprietary loan modifications remained less than 90 days past due for 80% of the modifications during this period indicate that servicers have become more efficient.

By the end of April recidivism of proprietary loan modifications over a 12-month period averaged at 80% of the borrowers performing, meaning most loans have performed satisfactorily for at least six months prior to default. (This number includes loans modified up to 18 months ago.)

Recidivism or proprietary loan modifications 90 days or more delinquent represented 19% of the active modification inventory, which remains at 240,000 and almost unchanged compared to March. So if approximately 20% of homeowners with proprietary loan modifications redefaulted after 90 days on a year-over-year basis, compared to March, recidivism averaged at 81% performing and 19% redefaulting after 90 days.

The number of modified loans 60 days or more delinquent in April increased slightly to 2.69 million, up 2% from the 2.63 million reported in March.

As expected due to the moratoria effect, in April foreclosure starts decreased 25% to 163,000, compared to 217,000 in March.

The loan modification market is shrinking as well. A positive outcome during the month, according to Hope Now, is the performance of proprietary loan modifications. It “remained steady” across the board including FHA, Fannie Mae, Freddie Mac and other private, non-HAMP modifications, which reported consistent performance in principal and interest payment reductions, fixed-rate offerings and recidivism.

The overall number of permanent proprietary modifications decreased 26% from 77,000 in March to approximately 57,000 in April. Up to 47,000 of these modifications, or 82%, were loans that benefited from reduced principal and interest payments—of which 30,000, or 53% of all proprietary modifications, received reductions of 10% or more. A significant 78%, or 45,000 of all proprietary modifications, were loans with an initial fixed-rate period of five years or more.

The use of various foreclosure prevention tools including lower rates, extended terms and principal forbearance or writedowns by the industry, the nonprofit community and the government entities has helped “create sustainable modifications.”

Such effective tools include homeowner education and borrower outreach efforts through collaborative face-to-face events, regional servicer one-stop shops and advanced home retention technology. Going forward, Hope Now said it plans to focus on programs such as the Treasury’s Hardest-Hit Fund initiative and the Emergency Homeowner Loan Program for unemployed homeowners designed by the Dodd-Frank Act.

It is not clear whether demand for loan modifications may continue to diminish going forward. New increases in the delinquency rates suggest new demand may arise.

The Lender Processing Services April Mortgage Monitor Report findings indicated delinquencies were up, yet in line with both old and new mortgage performance patterns.

In April a 2.4% increase in new delinquencies to 1.28% followed expected historical trends, according to LPS, and also is the largest jump in years, despite improvements compared to January 2011 and a 25% decrease compared to its peak in January 2010.

The total U.S. loan delinquency rate was 7.97%, up 2.4% compared to March, yet April marks “a continuing trend” of loan performance improvements. New problem loans hit a three-year low while the decreasing effect of the ongoing process reviews and moratoria on foreclosure starts and sales month-over-month.

The states with the highest percentage of loans in foreclosure or delinquent remain Florida, Nevada, Missouri, New Jersey and Georgia, even though foreclosure starts decreased 31% and foreclosure sales remained “well below pre-moratoria levels.”

The biggest challenge especially in the worst-performing markets is foreclosure timelines. It continues to extend following an upward trend that has been consistent in over three years.

As of the end of April up to 33% of the homeowners with loans in foreclosure have not made a payment in over two years. The average loan in foreclosure was 567 days past due, “the longest period on record,” LPS said.