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Job Loss Continues to Drive Overdues

Washington-Second-quarter delinquency data indicate the success of collective efforts to complete sustainable loan modifications depends on a still unstable job market as much as it depends on quality servicing.

"Loan mods can help someone whose rates have increased and income has decreased but what options do borrowers have when they're just laid off work?" said Jay Brinkmann, Mortgage Bankers Association's chief economist and senior vice president of research and economics during a recent conference call, a fact that is reflected in the second-quarter numbers of delinquency and foreclosure starts.

"Loan modifications that companies have put in place for some time now are addressed at borrowers who had high-debt income ratios - their debts were increasing but they still had income coming in. That's why what we see happening and the bulk of the impact is more in the subprime loan market and increasingly in some of the pay-option ARM loan markets."

According to MBA's Second Quarter 2009 National Delinquency Survey, the delinquency rate for mortgage loans on one-to-four unit residential properties rose to 9.24% of all loans outstanding, up 12 basis points from the first quarter of 2009, and up 283 basis points from one year ago.

The combined percentage of loans in foreclosure and delinquent or at least one payment past due was 13.16%, the highest ever recorded in the MBA delinquency survey, based on MBA records dating back to 1972.

In addition, the percentage of loans in the foreclosure process at the end of the second quarter was 4.3%, an increase of 45 basis points from the first quarter of 2009 and 155 basis points from one year ago.

The report shows an enduring increase in delinquencies is headed by prime fixed-rate loans.

"The problem in the prime fixed market is that if there is a job-related issue there's simply no income to deal with," Mr. Brinkmann said. "With those borrowers what you end up doing is work on an individual basis. What's it going to cost before they get another job? How long will it take? How much of a forbearance program can be put in place to give you time get another job? What skills are needed? Do they have to move to a different city? Which means having to do something else with the house. No national program can help a borrower who's out of work. So it's a matter of working one on one with those borrowers who still work and have had the house for years."

The problem really is that of one being out of a job in a declining market, he said. "Again, with these prime fixed loans when you look at some of the debt-to-income targets that are built into these programs - looking at the goal to achieve up to 31% - they will remain far below that loan-to-income ratio to begin with, so it's not an issue of coming back with a payment if they got sustainable income."

Beyond job loss and unemployment, some advocacy groups complain that servicers are not doing their part to improve the situation.

The Center for Responsible Lending, a Washington-based customer advocacy group, interpreted the data as a clear failure of loan servicers who "are not helping enough troubled borrowers through voluntary modification efforts."

Serious mortgage delinquencies reached record levels with one in 12 borrowers over 90 days past due or in foreclosure, compared to one in 22 borrowers in 2008, and only one in 40 borrowers in 2007, CRL stated in company release, adding "as a result, prospects for an improved housing market remain distant."

Mr. Brinkmann, on the other hand, says various loan modification programs have an impact on holding foreclosure rates below where they otherwise would be, "the issue is that many of the foreclosures involve homes that are vacant, borrowers who no longer have jobs, or loans where there was fraud involved. Therefore, in measuring the effectiveness of industry or government loan modification programs it is necessary to compare the results not with the total foreclosure and delinquency numbers reported here but with the smaller subset of borrowers who can and want to qualify."

In his outlook, Mr. Brinkmann finds it unlikely there will be meaningful reductions in the foreclosure and delinquency rates until the employment situation improves - especially among the so-called underwater borrowers with mortgages larger than the current value of their homes. "Any life events such as divorce or loss of a job are likely to translate into foreclosures until prices in those areas recover, not just flatten."

So if despite HAMP and overall industry efforts foreclosure starts are still going up, the question for the industry is: What type of borrowers are most likely going to be helped by a loan mod program?

"If you break it out by loan type and identify those, then you see that part of the reason the subprime ARM loan foreclosure starts rates dropped was that some of the increases were seen in the 90-day bucket because the borrowers being held under that bucket were under HAMP. Increases were seen in the prime fixed loan group," Mr. Brinkmann said, "and those perhaps are the least likely to qualify for a modification because it's more of a loss of job/income situation."

The report indicates a major drop in foreclosures on subprime ARM loans was offset by increases in the foreclosure rates on prime fixed-rate and other types of loans.

"As a sign that mortgage performance is once again being driven by unemployment, prime fixed-rate loans now account for one in three foreclosure starts," Mr. Brinkmann said. "A year ago they accounted for one in five. While 41 states had increases in the foreclosure start rate for prime fixed-rate loans, 43 states had decreases in that rate for subprime adjustable-rate loans."

Disproportionately California, Florida, Arizona and Nevada continue to have a high share of foreclosure starts, although it is slightly lower compared to the first quarter. Together these four states had 44% of all of the nation's new foreclosures during the second quarter, down from 46% in the first quarter of 2009.

Similarly, there was a major jump in FHA foreclosures.

"The percentage of loans with foreclosures started, the percentage of loans in foreclosure and the percentage of loans 90 days or more past due are all records for FHA. While the foreclosure starts rate for FHA loans at 1.15% is lower than all other loan types with the exception of prime fixed-rate loans, the FHA percentages have remained low due to a large increase in the number of loans outstanding, the so-called denominator effect," he said.

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