Despite their vocal opposition to principal reductions, major banks are actually reducing principal on loans they hold in portfolio and the redefault rate on these modifications is much lower than standard rate and term restructurings, according to a new report from Amherst Securities Group.
Using figures compiled by the Office of the Comptroller of the Currency, and Office of Thrift Supervision report, ASG analysts discovered that eight national banks and one thrift used principal reductions in modifying 10,580 loans held in portfolio during the third quarter. (The institutions were not identified.)
The OCC/OTS Mortgage Metrics shows that 25% of portfolio modifications involved principal reductions. But the banks completed only 117 modifications using principal reduction on loans they service for others.
"The modification success rate on portfolio loans is higher than other loans in which the bank does not own," ASG says in its report.
"Six months after modification, bank portfolio loans have an 18% re-default rate, versus 28-42% held by other investors," AGS analysts estimate. Fannie Mae and Freddie Mac loans have a 28% redefault rate, and loans in private label securities have a 42% redefault rate.
"Principal reductions are clearly the most effective type of modification," the ASG analysts conclude.
The analysts support the state attorneys' general proposal to require principal reductions as part of a settlement with the major banks over servicing and foreclosure violations. "We applaud the Attorneys' General proposal, as principal reductions are at the heart of their recommendations," they write.
