Last week, the OCC and OTS jointly released their third quarterly report on mortgage performance and the mortgage metrics data dictionary. Although this report reflects a rather bleak outlook on overall performance on mortgage loans and modified mortgage loans, the more granular data available to the agencies for this report suggest that some mortgage modifications are having a positive effect.
The report states that credit quality continued to decline in the 4th quarter with just under 90 percent of mortgages performing compared to 93 percent seen at the end of the 3rd quarter. This decline was represented in all loan risk categories, but subprime mortgages represented the highest level of serious delinquencies increasing from 10.47 percent at the end of the 1st quarter to 16.40 percent at the end of the 4th quarter. The percentage of Alt-A loans that were seriously delinquent increased from 5.18 percent to 9.10 percent over the same period. Notably, prime mortgages represented the largest increase, with 2.4 percent of mortgages seriously delinquent, more than double the rate of 1.1 percent as of March 2008.
The two previous Mortgage Metrics Report provided data on the overall results for the performance of modified mortgages, which showed high re-default rates, and which cast doubt on the efficacy of loan modification programs generally. The latest report shows the same overall result: re-default rates on modified mortgages were both high and rising during the first three quarters of 2008, with loans modified in the 3rd quarter representing the highest re-default rates. While the reasons for these high re-default rates were unclear, possible suggestions included the worsening economic climate, excessive borrower leverage, or poor initial underwriting.
However, as announced in February, the latest report expanded data collection on mortgage performance to the following four categories, with more telling and optimistic results: (i) loans on which monthly payments were reduced by more than 10 percent; (ii) loans on which monthly payments were reduced by less than 10 percent; (iii) loans without any change in monthly payments; and (iv) those with increased monthly payments. By the end of 2008, approximately 42 percent of modified loans yielded reduced payments, 27 percent in unchanged payments, and 32 percent in increased payments. The report found that re-default rates were lower for modifications that yielded lower monthly payments. Where loan modifications decreased monthly payments by more than 10 percent, only 22.7 percent of those loans became seriously delinquent after six months, compared to the 33 percent where the monthly payment was decreased by less than 10 percent, 50.6 percent where the monthly payment was unchanged and 45.8 percent where the monthly payment increased.
Commenting on the lower re-default rate, Comptroller of the Currency, John C. Dugan stated, “[t]hat result is fully in line with the approach taken in the Administration’s 'Making Home Affordable' program ….” OTS Acting Director, John E. Bowman, stated,“[t]he continuing decline in credit quality underscores the need for mortgage servicers to increases their efforts to modify home mortgages. Sustainable and affordable mortgages is a goal we all share for keeping more Americans in their homes.”