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Disclosure of National Bank and Federal Thrift Mortgage Loan Data
Fourth Quarter 2008
This OCC and OTS Mortgage Metrics Report for the fourth quarter of 2008 provides performance data on first lien residential mortgages serviced by national banks and federally regulated thrifts, for both the fourth quarter and the full year. This is the fourth quarterly report and third joint report by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS). This report provides a comprehensive picture of mortgage servicing activities of most of the industry's largest mortgage servicers, covering approximately two-thirds of all mortgages outstanding in the United States and incorporating information on all types of mortgages serviced, including subprime mortgages. More than 90 percent of the mortgages covered were serviced for third parties as a result of loan sales and securitizations.
Key findings of the report are summarized below.
Home Retention Actions: Loan Modifications and Payment Plans
Re-Default Rates of Modified Loans-in Aggregate
Re-Default Rates of Modified Loans—by Changes in Monthly Payments
As noted in last quarter's report, the reasons for high re-default rates are not clear. They could result from such factors as a significantly worsening economy with more borrowers losing jobs, excessive borrower leverage, issues affecting consumer willingness to pay, or poor initial underwriting. None of these factors can be easily captured in the type of data gathered by this report.
But another potential factor can be assessed more easily through data collection: the extent to which changes in monthly payments affect re-default rates. Loan modifications can reduce monthly payments, leave monthly payments unchanged, or increase monthly payments, depending on the circumstances.
Loan modifications may result in an increase in monthly payments where borrowers and servicers agree to add past due principal and interest, advances for taxes or insurance, and other fees to the balance of the loans and re-amortize the new balances over the remaining life of the loans. The interest rate on the loans may or may not be changed in these situations. Modifications may also result in an increased monthly payment for adjustable rate mortgages about to reset where the interest rate is increased but not by as much as contractually required. Servicers' modification activities also are dictated by private label and government agency servicing agreements which, in some cases, define the type and the amount of modification(s) that could be executed, and exclude modifications that reduce monthly payments. Servicers report, however, that recent changes in some government and private label servicing standards give them more flexibility to structure loan modifications that reduce monthly payments.
Servicers also modify some loans that leave principal and interest payments unchanged. One example is in cases where servicers "freeze" the current interest rate and payment instead of allowing the rate and payment to increase to the level that would otherwise be required under the contractual loan terms.
Modifications that result in a decrease in payments occur when banks elect to lower interest rates, extend the amortization period, or forgive or forbear principal.
Reduced payments make loan modifications more affordable, and it stands to reason that more affordable payments would be more sustainable and lead to lower re-default rates, whereas increased payments would lead to higher re-default rates. Data were collected for the first time in this quarter to determine whether loan modifications are more effective when loan payments are reduced. Modifications were grouped in four categories to reflect changes in monthly principal and interest payments, that is, modifications that (1) reduced monthly payments by more than 10 percent; (2) reduced monthly payments by 10 percent or less; (3) left monthly payments unchanged; and (4) increased monthly payments. Re-default rates were then calculated for each category. Key findings follow:
*Percentages may not add to 100 due to rounding
Home Forfeiture Actions-Foreclosures, Short Sales, and Deed-in-Lieu-of-Foreclosure Actions
1 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, the loans were result of acquisitions of loan portfolios from third parties where borrower credit scores at the origination of the loans were not available.
2 This declining percentage of loan modifications relative to payment plans may have resulted from the fact that, prior to contractually implementing new loan modifications, borrowers may be required to successfully complete a trial period to demonstrate the ability to make payments under the new terms. These "trial" modifications became more prevalent in the fourth quarter and are reported as payment plans until the successful completion of the trial period. However, additional data are required to determine the extent of this effect.
3 Insufficient time has passed to measure loans originated in the second and third quarter at nine months or to measure loans originated in the third quarter after six months. Data includes loans for those quarters only when they have had sufficient time to age the indicated number of months.
4According to servicers, one explanation for why loan modifications that result in unchanged payments would produce higher re-default rates is that modifications where the payment is unchanged generally do not involve a full assessment of the borrowers' capacity to continue their payments. Many of these modifications result from servicers freezing the interest rate on adjustable rate mortgages where borrowers face the risk of imminent default prior to the loan resetting to higher payments.
5 Insufficient time has passed to measure loans originated in the second and third quarter at nine months or to measure loans originated in the third quarter after six months. Data include loans for those quarters only when they have had sufficient time to age the indicated number of months.