Modified Loans Quick to Re-Default, Overall Mortgage Performance Declines

As efforts to keep borrowers in their homes continued to escalate, a report from major bank regulators said more than half of all mortgages modified in the first quarter of 2009 were in re-default in the third quarter—56.2% were 30 or more days delinquent and 42.7% were 60 or more days delinquent. The overall rate of current and performing loans also worsened, sliding to 87.2% by the end of the third quarter, down from 88.6% in the second quarter and 91.5% a year earlier.

The OCC and OTS Mortgage Metrics Report, Third Quarter 2009 includes data from reporting institutions servicing about 34 million first-lien mortgage loans, totaling approximately $6 trillion. The data account for about 65% of all first-lien mortgages outstanding in the U.S. The report is compiled by the Office of the Comptroller of the Currency and the Office of Thrift Supervision, both departments of the U.S. Treasury.

The efforts to help borrowers—including loan modifications, trial period plans and payment plans that allow borrowers to retain ownership and occupancy of their homes while attempting to return the loans to current and performing status—are known as home retention actions.

Newly initiated home retention actions rose 68.7% in the third quarter to 680,153 (153.2% increase from a year ago). More than one-third of those actions were under the Home Affordable Mortgage Program (HAMP) that the Obama administration launched earlier in 2009. Loan servicers initiated almost 274,000 HAMP trial period plans in the third quarter, a 240% increase from the second quarter. Other trial period plans increased 100% to 121,314; payment plans increased 28% to 153,499. Loan modifications were down slightly (7.7%) in the third quarter, as servicers emphasized the initiation of HAMP trial periods.

Principal and interest payments were reduced on 80% of all modified loans—almost half of those reductions lowered monthly payments by 20% or more. While re-default rates were lower when payments were reduced by 20% or more, more than one-quarter (26.7%) of those modifications were 60 or more days delinquent within six months; one-third (33.6%) were 60 or more days delinquent after nine months. Where modified payments were reduced by less than 10%, the corresponding rates of re-default were 39.7% and 49.8%, respectively.

Corresponding with the spike in retention actions, newly initiated foreclosures remained flat for the second straight quarter after rising 41% in the first quarter.