Analysis of Mortgage Servicing Performance January 2010
STATE FORECLOSURE PREVENTION WORKING GROUP
As this report goes to publication, one in seven borrowers is behind on their mortgage.
One in four homeowners with a mortgage owes more than their home is worth.
The unemployment rate is 10% nationally, with millions of additional Americans either out of the workforce or underemployed. Hundreds of thousands of homeowners have “pay option” ARM mortgages that are ticking time bombs for payment shock, when these loans reset to much higher payments. Despite efforts of servicers, homeowners, and the government, the foreclosure crisis continues to worsen. These signs point to more foreclosures in 2010 than in 2009.
While not every foreclosure is avoidable, too many homeowners experience foreclosure when finding an alternative solution would be in the interest of both the homeowner and the mortgage holder. Preventing these unnecessary foreclosures would help not only the struggling homeowners and mortgage investors, but also the neighborhoods and local governments that bear the indirect costs of foreclosures.
The federal Home Affordable Modification Program (HAMP) has led to offers of loan modification assistance to over 1.1 million homeowners; however, early indications are that servicers have been unable to implement the program effectively and many homeowners with trial modifications are not yet qualified to transition to a permanent loan modification.
Over two years ago, the State Foreclosure Prevention Working Group (“State Working Group”) met with the twenty largest servicers of subprime mortgages to encourage the development of more robust programs to prevent unnecessary foreclosures. In order to measure servicer efforts, the State Working Group has collected data from 13 servicers for over two years. This is the fourth public report, and the first in over a year.
When the State Working Group issued its first report, there was very little or no public information available on foreclosure prevention efforts by servicers; however, in the last year in particular, reporting of servicing data has become routine, more precise, and has covered a greater portion of the mortgage marketplace than the servicers reporting to the State Working Group. However, despite improvements in data collection, coverage and publication, these other reports fail to discuss aspects of foreclosure prevention performance critical to addressing the persistent and deep foreclosure crisis facing the nation. We hope this report fills part of this gap.
Findings from State Working Group Data
- The total number of struggling homeowners not on track for any foreclosure prevention assistance continues to grow. Only four out of ten seriously delinquent borrowers are involved in loss mitigation efforts.
- Both loss mitigation and foreclosure efforts appear backlogged.
- Most modifications result in payment reductions but principal reductions remain rare.
- Prime loans are increasingly driving the rising delinquency rates.
Recommendations to Prevent Unnecessary Foreclosures
- Servicers should suspend foreclosure proceedings on any loan currently involved in the loss mitigation process.
- Loss mitigation programs must be improved to prioritize principal reduction in areas of significant home price declines.
- Servicers need to pay particular attention to reforming payment-option ARM loans.
- The HAMP program must increase transparency and reduce paperwork in order to reach its potential.
- States should consider expanding counseling programs or implementing temporary foreclosure mediation or other such measures.
- Both servicers and Treasury should provide better options to keep unemployed homeowners in their homes.
It appears the very high level of foreclosure will get worse before it gets better. Even though investors continue to suffer very large losses and would benefit from more aggressive loss mitigation measures, current foreclosure prevention efforts have failed to develop efficient and sustainable work-outs for homeowners. The recent HAMP program has slowed the tide of foreclosures, but as of now, this program has been unable to get ahead of the increasing number of new delinquent loans. Furthermore, implementation failures have hindered the program’s ability to reach its full potential.
The State Working Group believes it is critical for servicers and government officials to explore new programs and processes to attack the tide of foreclosures, which is increasingly affected by home price declines and persistent high unemployment levels. Recent efforts have improved opportunities for close to a million homeowners, yet we are still losing ground. In addition, even the homeowners receiving temporary assistance are at risk of falling through the cracks and sliding to foreclosure.
Going forward, the State Working Group believes in some areas of the country principal write downs can be a critical component of successful loan modification programs, especially for homeowners in mortgage products like payment option ARMs that were structurally unsustainable absent continued home price appreciation. In addition, servicers must stop the race between foreclosure and loss mitigation efforts to ensure that preventable foreclosures do not occur simply as a result of miscommunication or overwhelmed systems.