Definitions and Methods

Fourth Quarter 2008

The report uses standardized definitions for three categories of mortgage creditworthiness based on the following ranges of borrowers' credit scores at the time of origination:

• Prime—660 and above.
• Alt-A—620 to 659.
• Subprime—below 620.

Approximately 14 percent of loans in the data were not accompanied by credit scores and are classified as "other." This group includes a mix of prime, Alt-A, and subprime. In large part, they are the result of acquisitions of loan portfolios from third parties where borrower credit scores at the origination of the loans were not available. Additional definitions are as follows:

• Seriously delinquent loans—All mortgages that are 60 or more days past due and all mortgages held by bankrupt borrowers who are 30 or more days past due. More generally, loan delinquencies are reported using the Mortgage Bankers Association (MBA) convention, which is that a loan is past due when a scheduled payment is unpaid for 30 days or more.
• Home retention actions—Loan modifications and payment plans. Home retention actions allow borrowers to retain ownership/occupancy of their homes, while attempting to return the loans to a current and performing status.
• Loan modifications—Mortgage for which terms of the loan are contractually changed with respect to interest rates or other terms of the loan.
• Payment plans—Short- to medium-term changes in scheduled terms and payments to return mortgages to a current and performing status. For purposes of this report, payment plans include loans that are in a trial periods with respect to making revised payments under a proposed loan modifications. The loans are reported as modifications after successful completion of the trial periods.
• Re-default rates—The percentage of modified loans that subsequently become delinquent or enter the foreclosure process. As alternative measures of delinquency, this report presents re-defaults rates using 30, 60, and 90 or more days delinquent and in process of foreclosure but focuses most frequently on the 60-day-delinquent measure.⁹
• Short sales—Sales of the mortgaged properties at prices that net less than the total amount due on the mortgages. Servicers and borrowers negotiate repayment programs, forbearance, and/or forgiveness for any remaining deficiency on the debt to lessen the adverse impact on borrowers' credit records. A short sale has less adverse impact on borrowers than foreclosure.
• Deed-in-lieu-of-foreclosure actions—Borrowers transfer ownership of the properties (deeds) to servicers in full satisfaction of the outstanding mortgage debt to lessen the adverse impact of the debt on borrowers' credit records. A deed-in-lieu-of-foreclosure action typically has less adverse impact on borrowers than foreclosure.
• Newly initiated foreclosures—Mortgages for which the servicers initiate formal foreclosure proceedings during the month (e.g., public notice or judicial filing). Many newly initiated foreclosures do not result in the loss of borrowers' homes, because servicers simultaneously pursue other loss mitigation actions and borrowers may act to return their mortgages to current and performing status.
• Foreclosures in process—The number of mortgages for which servicers have begun a formal foreclosure proceedings (e.g., public notices or judicial filings) but have not yet completed the process resulting in the loss of borrowers' homes. The foreclosure process varies by state and can take from two to 15 months or more to complete. Many foreclosures in process never result in the loss of borrowers' homes, because servicers simultaneously pursue other loss mitigation actions and borrowers may act to return their mortgages to current and performing status.
• Completed foreclosures—Ownership of properties is transferred to servicers or investors and mortgage debts are extinguished. Completed foreclosures' ultimate result is the loss of borrowers' homes because of nonpayment.

The statistics and calculated ratios in this report are based on the number of loans rather than on the dollar amount outstanding.

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