Good News on Loan Mods - OCC/OTS direct lower payments

A report released on April 3 concludes the obvious:  a study shows that loan modifications that reduced monthly payments had a lower rate of redefaults.  The good news is that the Office of the Comptroller of the Currency and the Office of Thrift Supervision directed the banks and thrifts that provide data for the Mortgage Metrics report to assess their criteria for loan modifications woudl result in affordable and sustainable modifications.  The OCC and OTC included loan modifications already made in 2008 in their direction.

The study confirmed what had been widely reported earlier — a high percentage of borrowers with approved loan modifications had fallen behind or defauted.  What had not been reported was that almost 60% of the loan modifications approved in 2008 resulted in either no change to the borrower’s monthly payments, or an actual increase.  Reasons for this included the fact that in many cases, the lender merely froze the rate on an adjustable loan (ARM), and in some cases recapitalized the past-due amounts, resulting in a higher monthly payment.  These modifications achieved the goal of avoiding foreclosure, but not for sustained periods.  According to the report, loan servicers said their flexibility to reduce payments was constrained by servicing agreements with government-sponsored entities and private investors that restricted the type and amount of loan modification permitted.  Recent changes in both government and private servicing standards should provide greater flexibility to loan servicers.

The report covered mortgages serviced by nine large banks and four thrifts that constitute two-thirds of all outstanding mortgages in the United States.  One interesting revelation was that the biggest percentage jump in serious delinquencies was in prime mortgages, which account for nearly two-thirds of all mortgages serviced by the reporting institutions.  Delinquencies in this lowest loan risk category more than doubled in the fourth quarter of 2008!  The subprime mortgage category continued to have the highest level of delinquencies.  Possible reasons for the re-default rates included the worsening economy, excessive borrower leverage, or poor initial underwriting.

Real estate investors, business entrepreneurs and homeowners recognize that the most critical element of a sustainable transaction is cash flow.  Modifying loan servicing standards to allow lenders to make loan modifications that work with a borrower’s cash flow will go a long way to avoid redefaults and foreclosures.  The report provides strong support for the Administration’s loan modification program, which is primarily based on lowering monthly payments in order to achieve sustainable modifications.  Since the OCC/OTS report reflects servicers for about two-thirds of the nation’s outstanding mortgages, we can only hope the message gets out quickly!