Tuesday, June 30, 2009

Modifications and Re-Default

by Calculated Risk on 6/30/2009 04:42:00 PM

Earlier I posted some graphs on the surge in prime delinquecies from the OCC and OTS Release Mortgage Metrics Report for First Quarter 2009

See: OCC and OTS: Prime Delinquencies Surge in Q1

Here is some info on types of modifications:

While 185,156 mortgages were modified in the first quarter of 2009, 122,398 were “combination modifications” that changed more than one term of the loan. Of the modifications made in the first quarter of 2009, 70.2 percent included a capitalization of missed payments and fees, 63.2 percent included a reduction in interest rate, and 25.1 included an extended term. By comparison, 12.6 percent of the mortgages received modifications that froze the interest rate, 1.8 percent included a reduction of principal, and 1.1 percent included a deferral of principal. All modification actions during the quarter are indicated in the table below. Since nearly two-thirds of the modifications changed more than one loan term, the sum of the percentages in the table exceeds 100 percent.

The types of actions taken have different effects on the borrower’s principal and interest payments and may, over time, have different effects on the long-term sustainability of the loan.

Of the nearly two-thirds of modifications that were combination modifications that involved two or more changes to the terms of the loan, 83.4 percent of them included capitalization of missed payments and fees, 86.1 percent included reduced interest rates, 36.3 percent included extended maturities, 12.4 percent included interest rate freezes, 2.8 percent included principal reductions, and 1.6 percent included principal deferrals.
Modification Types Click on graph for larger image.

In normal times, a capitalization of missed payments and fees is effective - because usually the homeowner fell behind for a short period because of a lost job or an emergency expense.

However, in these times with many homeowners underwater (with negative equity), capitalization isn't very effective. A reduced interest rate or longer term might be helpful.

Recidivism Rate And here are the re-default rates.

This graph shows that about 30% of modified loans re-default in the first quarter after modification and about half within the first year. This suggests modifications have not been very effective.
The percentage of loans that were 60 or more days delinquent or in the process of foreclosure rose steadily in the months subsequent to modification for all vintages where data were available. It is noteworthy that modifications implemented in the first two quarters of 2008 re-defaulted at a lower rate than those in the third quarter, measured at the same number of months after modification. Those modifications implemented in the fourth quarter of 2008 have re-defaulted at a slightly lower rate than the preceding quarter. However, it is too early to determine whether the data for the fourth quarter portend a sustained improvement in performance resulting from recent changes to modification practices.