Following concerted efforts to prevent unnecessary foreclosures, the Washington Attorney General’s Office and a group of other state attorneys general and banking regulators say they’ve seen improvements in programs designed to help homeowners. But they’re concerned that foreclosures continue to outpace loan modifications, and note that most modifications increase the loan balance.
According to a report issued by the State Foreclosure Prevention Working Group, a multi-state coalition, recent loan modifications are performing better. Modifications can include reduced interest rates and other changes to terms that result in smaller payments and, in some cases, lower outstanding balances.
“Some analysts have predicted redefault rates as high as 75 percent but today’s report paints a brighter picture of the future,” Washington Attorney General Rob McKenna said. “The newer modifications are holding up better, with fewer borrowers redefaulting.”
The report tracks loan modifications made by nine mortgage companies who were servicing 4.6 million loans as of March 2010. Banks, which are regulated by federal agencies, are not included. Compared to loans modified in 2008, borrowers whose loans were modified in 2009 were 40-50 percent less likely to be seriously delinquent six months later.
The Office of Thrift Supervision (OTS) and the Office of the Comptroller of Currency (OCC) reported a similar reduction in redefault rates in their Mortgage Metrics Report for the first quarter of 2010. The agencies reported that of the 590,000 modifications made in 2009, nearly 52 percent were current at the end of the first quarter of 2010. Only 27 percent of the modifications implemented during 2008 were current.
McKenna and his office have been leading efforts to help homeowners, including cracking down on unethical lenders and fraudsters, advocating for modifications of mortgages that have become unaffordable, urging changes to bankruptcy rules, and seeking state-federal collaboration on bank regulation. The Washington Attorney General’s Office granted $920,000 of its Countrywide/Bank of America settlement payment for local foreclosure prevention programs that provide counseling and pro bono legal services.
Despite the progress made on the sustainability of the loan modifications being made, McKenna said he’s concerned that 6 out of 10 seriously delinquent borrowers are not getting any help. The majority of loan modifications (89 percent) tracked by the working group for the first quarter of 2010 showed some reduction in payments, and nearly 78 percent lowered the monthly payment by more than 10 percent.
Redefault rates were lower for loan modifications that reduced the principal balance by more than 10 percent. However, only 1 in 5 modifications reduce the loan amount and, in fact, the vast majority increase the balance by adding servicing charges and late payments.
“When housing prices are low, the lender is going to take a loss if that home is foreclosed and surrounding home values will ultimately be impacted,” McKenna said. “The underlying theory of a loan modification is to enable the lender to get the same value out of the home as if it had been foreclosed. The lender still takes a loss through the reduction of interest or principal. But the net result is better for the community and the borrower because, of course, a house is more than just an asset. It’s a home.”
The State Foreclosure Prevention Working Group consists of 12 state attorneys general (Arizona, California, Colorado, Florida, Illinois, Iowa, Massachusetts, Nevada, North Carolina, Ohio, Texas and Washington), bank regulators for New York, North Carolina, and Maryland, and the Conference of State Bank Supervisors.
For more information, visit www.atg.wa.gov.