Friday, October 16, 2009

First Fed California Modifies Performing Loans, Brags about 28% Default Rate

by Calculated Risk on 10/16/2009 03:26:00 PM

First Federal Bank of California put out a press release claiming better modification performance than the national average:

Compared to the national average, far fewer loans modified by the Bank have defaulted as of August 31, the latest date for which there is comparative data. Just 28.3% of the loans modified by First Federal Bank of California in the first quarter of 2008 had become at least 30 days delinquent 12 months after they were modified. By contrast, that figure is 65.9% for national banks and federally regulated thrifts, according to a September report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
Wow. Maybe other banks can learn something from First Fed on loan modifications!

But wait:
Over 90% of the loans that the Bank has modified since the program started were current at the time they were modified. The Bank converted many adjustable-rate loans into fixed-rate mortgages for up to 10 years and eliminated negative-amortization provisions for modified loans. These steps have reduced the risk of foreclosure and potential loan losses.
Not so impressive. Most loans that are modified by national banks are delinquent, and redefault rates are much higher than initial default rates.

Amherst Securities noted that this week (no link):
[R]e-performing loans are defined as those that were once more than 60 days delinquent, and are now less than 60 days delinquent. This can occur either through natural curing or modifications. However, these re-performing loans do not perform in the same manner as loans that have never been delinquent.

In particular, the default rates on the re-performing bucket is huge. Most of these loans will eventually fail. The question is just – when?
Of course First Fed is targeting loans that will probably default (a good strategy), but the solution of modifying to a low fixed rate for up to ten years (without principal reduction), sounds like "extend and pretend".