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Mortgage `Workouts' Overwhelmed by Rising Foreclosures

Feb. 7, 2008 (EIRNS)—A study by the State Foreclosure Prevention Working Group, made up of state Attorneys General and bank regulators from 11 states, says that mortgage companies have stepped up their efforts to work with delinquent borrowers, but that effort is not keeping up with the rise in bad loans. According to a press release today by Ohio AG Marc Dann, the report includes information from 13 of the top 20 servicers, which provided the requested data for the month of October, 2007. These servicers (agents that collect payments on mortgage loans and transfer those payments to the investors who own those loans) represent 58 percent of the total subprime servicing market. AG Dann highlighted the following specific findings of the report:

  • Seven out of ten seriously delinquent borrowers are not getting any assistance from their servicers in keeping their house. The data show a large gap between the number of homeowners needing help and the number currently receiving assistance. The data suggest that a rising number of loan delinquencies are outpacing the increase in servicers' efforts to help homeowners.

  • Servicers have increased their use of loan modifications and other home retention options. The report shows that in October, only 9 percent of the delinquent borrowers getting help from servicers had gotten a loan modification. However, the sector is reporting currently that 45 percent of homeowners were being considered for loan modifications. Servicers are increasing their use of longer-term changes to the mortgage loan versus their earlier reliance on short-term repayment or forbearance agreements.

  • Payment resets on Adjustable Rate Mortgages (ARM) have not yet been a driving force in foreclosures. A significant percentage of subprime adjustable-rate loans become delinquent before their loan payment rate jumps to a higher amount, which happens usually two to three years into the loan. This suggests weak underwriting, or fraud, in the origination of the loan.

  • Homeowners are helping themselves. Resolution of most delinquent loans in October 2007, occurred due to the homeowner catching up on back payments. That is, homeowners, not servicers, have prevented the most foreclosures.

  • The refinance option has nearly evaporated. Historically, serial refinancing was the primary way that the mortgage business and homeowners managed delinquencies in subprime loans. Despite recent interest rate cuts, the mortgage business will not be able to refinance its way out of this crisis, absent dramatic changes in available loan "products" or a reversal in home price declines.

The Wall Street Journal's article today on the Working Group's report says that it also highlights tensions between state and federal officials. JP Morgan Chase and Wells Fargo refused to provide data to the working group "on the advice or direction" of the Comptroller of the Currency. The Comptroller's comments on the matter essentially say that the states should butt out of the affairs of banks which are Federally-supervised, and focus only on state-regulated banks.