Banking giants see surge in loan modifications

Mortgage modifications surged in the first quarter at the nation's largest banks, reversing a yearlong decline, while foreclosure activity also saw a marked uptick, according to a new government report.

The data suggests rising financial stress is hitting certain borrower segments, even as conditions for the mortgage market overall appear relatively strong, based on numbers in the Office of the Comptroller of the Currency's quarterly mortgage metrics report. The report covers first-lien servicing data provided by seven of the largest national banks OCC oversees, including JPMorgan Chase, Bank of America and Wells Fargo. 

The banks initiated 7,889 modifications between January and March. The latest number accelerated 7.6% from the 7,332 modifications posted during fourth-quarter 2024. 

The latest total is also the highest since the 7,926 recorded a year ago, with activity slowing over subsequent quarters as last year progressed.

Among the total, "92.1% were 'combination modifications'— modifications that included multiple actions affecting the affordability and sustainability of the loan, such as an interest rate reduction and a term extension," OCC said. 

New terms on 4,086, or 51.8%, of the loans with combination modifications reduced the mortgage holder's monthly payment. 

Increasing alongside loan modifications was foreclosure activity, with 10,667 new filings recorded by the banks. Volume was 60.5% higher than fourth quarter's 6,647. On a year-over-year basis, foreclosures increased 44% from 7,408 in early 2024.    

Why are foreclosures and loan modifications rising?

While the OCC report did not provide a breakdown into the types of loans or borrowers experiencing stress, the surge in both modifications and foreclosures showed up as loss-protection measures for Department of Veterans Affairs mortgages expired at the end of last year. The end of a foreclosure moratorium, followed by the full termination of the Veterans Affairs Servicing Purchase program led to a scramble among banks and lawmakers to make assistance available for distressed VA borrowers.

Currently, negotiations are underway to implement a new partial-claims program to succeed VASP, but passage of any legislation is likely to take months. 

While VA borrower difficulties are likely a cause of elevated loss-prevention servicing activity, housing researchers have also noted an increase in the number of Federal Housing Administration-backed loans and a smaller uptick in conventional mortgages entering delinquency this year compared to 12 months earlier. 

The data indicates that economic challenges, including interest rates that remain more than two times higher than levels of a few years ago, may also be driving some hardships. A significant fall in rates below 6% that would offer borrowers potential refinance relief is not expected for several months.  

Just over 25% of homeowners who received modifications two quarters earlier were still struggling to make payments at the end of March, according to OCC. Servicing customers within that segment were either 60 days past due or had fallen in the foreclosure process.    

Overall numbers suggest mortgage borrower strength

Although a rise in modifications and foreclosures is worth watching, OCC data also pointed to generally strong financial health of the overall mortgage market.

The share of mortgages current and performing came in at 97.6% during the first quarter, the highest in two years. The most recent percentage increased from 97.3% three months earlier and 97.4% a year ago. 

The seven banks reporting serviced approximately 10.9 million residential mortgages, accounting for $2.71 trillion in unpaid principal balance. The balance represented 20.1% of all U.S. mortgage debt outstanding. 

Total unpaid servicing principal decreased 1.2% on a quarterly basis from $2.74 trillion and also fell 3.5% from $2.81 trillion in the first quarter of 2024.