Capital markets fintech company dv01 analyzed Non-Qualified Mortgage loan modifications, and found a noticeable shift in borrower payment behaviors has emerged, with a significant decline in loan modifications and a transition from temporary deferrals to permanent payment reductions. This transition has resulted in nearly one-third of all modifications now involving reduced payments, marking a substantial change in the way borrowers are managing their loans.
Despite these efforts, the rate of negative outcomes in loan modifications has deteriorated over the past six months. There has been a rise in delinquent loans, from 7% to 10%, and a consistent 6% of loans requiring payment reductions. On a more positive note, 32% of loans have returned to current status, albeit slightly down from 33.4% six months ago.
Data indicates a steady rate of approximately 25% for 30-plus-days-delinquent loans making zero payments, while a marked improvement has been observed in 90-plus-days-delinquent loans, suggesting a commitment among borrowers to make some payments despite serious delinquency. This contrasts with a decrease in the cure rate among 30-plus delinquencies, highlighting a growing challenge for borrowers to avoid serious delinquency.
The biggest behavioral change noted in recent years is the significant number of borrowers making payments without fully curing their delinquent status. The report noted an increase in borrowers making three to five payments, and particularly those making six or more payments over the last six months without achieving a cured status, with the majority not requiring a modification.
Consumer Unsecured loans presented a stark contrast in cure behaviors compared to mortgages, with a notably lower cure rate due to different charge-off policies and the absence of collateral. However, there has been a notable improvement in the Consumer Unsecured sector over the past six months, suggesting a positive trend in consumer credit performance despite higher charge-offs and impairments.
The analysis also highlights slightly-worsening modification outcomes in Consumer Unsecured loans, with an increase in delinquency rates following modifications. Nonetheless, the effort to engage more borrowers in modification processes, despite increasing negative outcomes, is seen as a net positive for both issuers and investors due to the relative improvement compared to delinquency outcomes.
