Following the Trailing Effect of Modifications

Mortgage Bankers Association delinquency data feed industry concerns about how long into the future modified loans will affect overall mortgage performance.

Mortgage moratoriums, HAMP and other loan-mod programs will continue to create a trailing effect on the overall number of foreclosures, Jay Brinkmann, MBA's chief economist and SVP, said during a press conference.

Now the timeline between a loan modification and the time when a loan actually goes into foreclosure is longer, he said, and a problem loan today may still be a problem six months later if the borrower fails to make those required payments.

"In six months we'll see foreclosures essentially from delinquencies that occurred in the first part of 2009, and later on what occurred in 2010 will be seen perhaps by the end of 2010 or in 2011 creating a trailing effect."

This crisis is different, he said. Normally any kind of economic pickup would help avoid this trailing effect as improvements in home prices would offset some of the foreclosure rate.

"The problem is that if you're in an area where prices dropped 30% and you're under water, just because prices come back up 2% to 3% it does not help much." What is different about this recession, Mr. Brinkmann said, is that the mortgage crisis preceded the overall economic crisis making the overall economic recovery far more difficult.

The economist noted, however, that "the trailing effect" is more of a symptom of the economic crisis than a driver of foreclosures.

"It will have a certain effect on prices in certain markets, but it will have more to do with what is happening in job creation, and job creation really won't be impacted by the foreclosure rate," he said.

California, Florida, Arizona and Nevada remain the four most problematic states.

These four states featuring the highest delinquency rates in the country have a large impact on the national results including 67.6% of delinquent prime ARM loans.

According to Mr. Brinkmann, with 45% of subprime ARMs in foreclosure and 67% somehow past due, Florida is expected to remain one of the worst performing states well into 2012 and 2013.

Another problem is the fact that information and data collection about workouts and HAMP are not yet sufficient to determine their sustainability.

Hence, lenders and servicers do not know until a year later whether the so-called cured loans are really cured. Mr. Brinkmann expects to see the after effect of the current spike in unemployment rates in delinquencies that may peak in the first six months of next year.

According to figures compiled by National Mortgage News, consumers owe $9.8 trillion on their homes, which means (based on the MBA's late payment rate) that $944.7 billion in mortgages are 30, 60, or 90 days late or in foreclosure.

Roughly $238 billion in subprime mortgages are delinquent as well.

MBA data show delinquencies and foreclosures on residential loans jumped in the third quarter with delinquencies reaching a record 9.64% - up 40% compared to a year ago. On a nonseasonally adjusted basis the 3Q09 delinquency rate was 9.9%.

Due to a "strong seasonal component" in the fourth quarter of the year when there is "a sharp jump in 30-day delinquency" due to holiday and other end-of-the-year expenses, Mr. Brinkmann said, but the many other factors at play here "completely overwhelm any seasonal impact."

Overall, up to 14.4% of borrowers are one payment or more past due or in foreclosure, which combines the nonseasonably adjusted numbers with delinquency and foreclosure rates.

Delinquencies are driven by loans 90-plus days past due, a category that includes loans held in preforeclosure status, attempting workouts, modifications, representing loans that mortgage servicers have been trying to sustain working with borrowers to qualify them for a workout or forbearance or are approved for a trial modification under the Home Affordable Modification Program.

Since the number of such loans has increased so has the number of loans in the 90-plus-day delinquent category.

According to Mr. Brinkmann, moratoria time limits put in place in different states will also impact future delinquency rates to some extent.

"There certainly is a trailing effect. There's pipelines of loan workouts that have been established and now's about working through those pipelines to get those transactions to conclusion. That is imminently in front of us now," said Rick Seehausen, president and CEO of LenderLive Network Inc., a provider of mortgage outsourcing solutions to some of the nation's largest financial firms.

As with every new program, HAMP will take a little more time to reach structural and functional maturity.

"Once the program gets launched people have an opportunity to start getting experience with it, make modifications to the process, tweak the procedures, modify the parameters and guidelines."

Mr. Seehausen sees the trailing effect as an expression of the "continuous improvement model" approach to loan modifications and dealing with the foreclosure crisis.

"Those are all things to be expected. That's what we're seeing right now. So there are efforts being placed in streamlining the processes and procedures," he said. "And that shouldn't stop until you get to evaluate what you're doing, why are you doing it and are there better ways to do it? We'll continue to see more improvements in policies and procedures as time goes on. That's sort of the convergence. Capacity will continue to expand, technology will continue to improve and the program itself will continue to evolve procedurally until at some point, hopefully midyear next year, capacity and demand will be in alignment. I'm optimistic."