OCC/OTS Report: Prime Borrower Mortgage Loan Delinquencies Still On The Rise

Another day, another report that mortgage delinquencies arerncontinuing to rise and this time the increase is most notable among primernborrowers. However, on the brigt side, home retention efforts are now outstripping both newrndelinquencies and new foreclosures.  

The Office of Comptroller of the Currency and the Office ofrnThrift Supervision released their joint Mortgage Metrics Report for the fourthrnquarter of 2009 last Thursday.  The reportrncovers more than 64 percent of all mortgages outstanding in the United States;rnnearly 34 million loans totaling almost $6 trillion in principal balances.  Most of the major loan servicers provide datarnfor the report which covers information on loan performance for all types ofrnfirst-lien mortgages.

Overall mortgage performance declined 0.9 percent during thernfourth quarter.  This was the seventhrnstraight drop and current and performing mortgages now represent only 86.4rnpercent of the total portfolio. 

7.1rnpercent of all loans are seriously delinquent, i.e. over 30 days past due, andrnthose 90 or more days in arrears increased by 21.1 percent since the thirdrnquarter and now represent 4.7 percent of all mortgages in the portfolio.

Seriouslyrndelinquent prime loans increased by 16.5 percent and among early stage delinquenciesrn- those 30 to 59 days past due – a group that remained relatively stablernoverall, the percentage of prime mortgages increased from 1.8 to 1.9rnpercent.  The report noted that therncontinued decline in the performance of prime mortgages reflect the increasingrnimpact of economic conditions on those borrowers and is significant becausernthose mortgages account for 68 percent of the entire portfolio.

As has been noted in other recent reports on foreclosurernpatterns, the increase in seriously delinquent mortgages is attributable inrnpart to mortgages being held in delinquent status for longer periods beforernproceeding to foreclosure.  This is arnresult of recent state laws requiring various types of notice to borrowers andrnopportunities for them to cure defaults as well as various state, federal, and proprietaryrnforeclosure prevention programs.  For thernsame reasons newly initiated foreclosures declined while the number ofrnforeclosures in process remained stable.

Servicers participating in the Treasury Department's HomernAffordable Mortgage Program (HAMP) enrolled 259,500 borrowers in trialrnmodifications during the quarter and converted over 21,000 trials intornpermanent modifications.  Other lossrnmitigation programs resulted in 102,102 loan modifications and 116,600 paymentrnplans during the quarter.  Overall, servicersrnimplemented more than 594,000 new home retention actions in the fourthrnquarter.  This exceeded the 261,346rnincrease in delinquent mortgages and was double the number of loans enteringrnforeclosure.  The number of new homernretention actions implemented during the fourth quarter was also double thernnumber initiated in the same quarter of 2008 but was a 12.4 percent decreasernfrom the third quarter of 2009.  Bothrnnumbers are attributable to the implementation of HAMP which created a surge ofrnactivity in the second and third quarters. rnFor a number of reasons, however, new HAMP interventions are now proceedingrnmore slowly.

More than 82 percent of loan modifications reduced monthlyrnmortgage payments including 100 percent of HAMP modifications.  Principal deferral was included in 6 percentrnand principal reduction in 7 percent. rnPrincipal reductions were confined almost entirely to loans held in thernservicers' own portfolios.

Modifications made in the second and third quarters of 2009rnperformed better at 3 months and 6 months than older modifications.  This corresponded to the number ofrnmodifications that reduced monthly payments which also performed better thanrnthose that left payments unchanged. rnStill the failure rate remained high with more than half of allrnmodifications falling 60 days or more delinquent within 9 months ofrnmodification.  Modifications to loansrnheld in the servicers' own portfolios also performed better on average,rnpossibly due to greater lender flexibility. rnModified government-guaranteed mortgages performed the worst in terms ofrndefaults at the 6, 9, and 12 month post-modification marks.

Servicers reported that HAMP and other foreclosurernmitigation efforts will help a significant number, but by no means all, distressedrnborrowers. They expect new foreclosures to increase in the future as borrowers andrnlenders exhaust other alternatives.

Servicers have been encouraged to work with borrowers with subordinate liens.  Lack of information hasrnconstrained many efforts to restructure loans where junior liens are involvedrnbut various initiatives are underway to increase communication between lenders.  These second liens present additional risk andrnOCC and OTC have instructed banks and thrifts that hold them to increase loanrnloss reserves accordingly.

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