The OCC and OTS Mortgage Metrics Report, Third Quarter 2010 said 382,751 foreclosures were initiated in the quarter—the most in more than a year. The report also indicated that “new foreclosure actions are likely to continue rising as alternatives for seriously delinquent borrowers are exhausted.”
The report covers about 64% of all first-lien mortgages in the country—about 33.3 million loans with $5.8 trillion in outstanding balances.
The report said 87.4% of all mortgages were current and performing in the third quarter, the same rate as the previous quarter but slightly better than the 87.2% rate in the year-ago period; 5.8% of all loans were seriously delinquent (60 or more days past due, or 30 or more days past due in the case of borrowers in bankruptcy), down from 6.2% a year earlier. However, the report noted a slight uptick to 3.2% in the rate of loans delinquent between 30 and 59 days.
While the number of loan modifications declined by 17% from the previous quarter, lenders continued to aggressively pursue principal and interest rate reductions of loans they did modify. In the overall portfolio, 88.2% of modifications made in the third quarter reduced principal and interest payments; and 54.1% reduced monthly payments by more than 20%. Nearly all modifications under the Home Affordable Mortgage Program (HAMP) reduced borrowers’ principal and interest payments, and 76% reduced monthly payments by 20% or more.
Re-default rates continued to drop on modified mortgages. Only 10.5% of loans modified in the second quarter of 2010 were 60 or more days delinquent three months after modification compared with an 18.7% re-default rate in the same category a year earlier. Likewise, 4.7% of loans modified in the second quarter were 90 or more days delinquent three months after modification compared with 9.6% a year earlier. The corresponding re-default rates for HAMP modifications were lower across all categories.
The report is available at tinyurl.com/4qajkkt.
The FDIC approved an interim final rule under the Dodd-Frank Wall Street Reform and Consumer Protection Act that Chairman Sheila Bair said furthers the statutory intent that “creditors bear the losses of any failure.” The rule clarifies how the agency will treat certain creditor claims under the new orderly liquidation authority established under Dodd-Frank.
“Shareholders and unsecured creditors should understand that they, not taxpayers, are at risk,” Bair said in a press release. “This rule represents a significant narrowing of the discretion provided under Dodd-Frank for differentiation among creditors, consistent with the law’s overarching public policy objectives to maximize market discipline and make clear that all equity and unsecured debtholders are at risk of bearing loss.”
The FDIC’s press release further emphasized: “In no event may taxpayer money be used to cover losses associated with the failure of a large financial firm.”
Title II of Dodd-Frank provides a mechanism for appointing the FDIC as receiver for a financial company if the company’s failure and its liquidation under the Bankruptcy Code or other insolvency procedures would pose a significant risk to the financial stability of the United States.
The interim final rule differs from the Notice of Proposed Rulemaking (NPR) (tinyurl.com/2bbd3r6), which was released in October 2010, by clarifying the standard for valuation for collateral on secured claims and by clarifying the treatment of contingent claims. One aspect of the NPR elicited a number of comment letters: The availability of additional payments to creditors under the authority of Dodd-Frank.
The interim final rule does not change this proposal from the NPR. The FDIC said many people who submitted comments said it was important to limit any “additional payments” as a means of reducing moral hazard and instilling market discipline. Others were concerned with the prohibition of any additional payments to holders of long-term debt, which is defined as debt with an original term of more than 360 days, based on the misapprehension that shorter-term creditors are likely to receive such payments.
The FDIC said in its press release that, under the standards of Dodd-Frank and the interim final rule, the concern is unwarranted. Short-term debtholders are highly unlikely to meet the criteria set forth in the statute for permitting payment of additional amounts. In virtually all cases, holders of shorter-term debt will receive the same pro rata share of their claim that is being provided to the long-term debtholders.
Under the interim final rule, no creditor can receive any additional payment unless the FDIC Board of Directors has determined, by recorded vote, that the payments meet the statutory standards. In addition, such payments are subject to recoupment if ultimate recoveries are insufficient to repay any temporary government liquidity support provided as part of the orderly wind-down. This recoupment must occur before imposition of a general industry assessment to cover any shortfalls. The interim final rule also addresses discrete issues within the following broad areas:
1. The authority to continue operations by paying for services provided by employees and others (by clarifying the payment for services rendered under personal services contracts);
2. The treatment of creditors (by clarifying the measure of damages for contingent claims); and
3. The application of proceeds from the liquidation of subsidiaries (by reiterating the current treatment under corporate and insolvency law that remaining shareholder value is paid to the shareholders of any subsidiary).
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