FHFA: Delinquencies Still on Rise; GSEs reducing Portfolio Risk

Programs are underway on so many fronts to get foreclosures under control that it can be difficult to sort them all out. Early last week the Office of Thrift Supervision and the Office of Comptroller of the Currency issued their second quarter summary of foreclosure avoidance activity among large loan servicers; on Friday it was the Federal Home Finance Agency's (FHFA) turn to report on the progress of the two government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae.

Like the OTC/OCC report on its Making Home Affordable Program, FHFA's report on its Home Affordable Modification Program (HAMP) shows a program that is moving forward and growing fast but not without those problems inherent in a start-up.    

The two GSE's portfolios increased by a net of 58,000 loans or 0.2 percent during the second quarter as they took in new loans through purchases and issuances at a greater rate than they liquidated loans.  The two have a total of 30.4 million loans under service.

Mortgage delinquencies in the Fannie/Freddie portfolio are continuing to increase. Loans that are 30 days delinquent increased by 11 percent during the second quarter to 682,000 and loans in the 30-59 day bucket rose 20 basis points to 2.2 percent of all loans.  However, 27,000 more loans became 60 or more days delinquent.  This is an increase of 21percent and there are now 1.3 million 60+ day delinquent loans in the portfolios.

Nearly 50 percent of delinquent borrowers cited loss or curtailment of employment as the reason for their problems compared to 43 percent during the first quarter.  But HAMP itself, in its start-up phase, contributed to the increases.

The number of aging delinquencies increased in part because fewer loans transitioned to foreclosure as usually happens around the 90 day delinquency point.  Instead, foreclosure activity is suspended for those borrowers requesting HAMP modifications.  Also those loans in the required 90 day trial modification period continue to be reported as delinquent until the trial period is completed.  Servicers are also stretched thin trying work through the backlog of delinquent loans requesting HAMP intervention.

Despite the requirement for suspension of foreclosure activity, foreclosure starts increased by 23 percent in the second quarter to a total of 299,200 as activity continued for vacant or non-owner occupied properties and those where the borrower was determined to be ineligible for HAMP.  

Completed foreclosures totalled 57,800 during the quarter, an increase of 38 percent over the first quarter.  Again this number was driven by non-HAMP eligible loans.

This lack of eligibility continues to keep the percentage of trial modifications low relative to the number of delinquent loans.  The GSEs estimate that 30 to 40 percent of delinquent borrowers are either non-occupants, bankrupt, or have abandoned the houses.  

 HAMP's loan modification activity continued to ramp up during the second quarter.  As of June 30 there had been 66,200 borrowers entered into a trial modification period.  That number almost doubled to 131,200 by the end of July and increased to 202,200 in August.  At the same time, completed actions to prevent foreclosure dropped by 25 percent to approximately 58,200 and completed modifications were down 13 percent to 32,000 during the quarter as the required trial period replaced traditional modifications that might have been completed during that time.

Borrowers whose payments decreased by 20 percent or more accounted for 54 percent of loan modifications completed during the quarter compared to only 8 percent during the same period in 2008.

Acting FHFA Director Edward DeMarco who released the report stated "We expect the number of completed loan modifications to increase as homeowners complete the HAMP trial period.  Fannie Mae's and Freddie Mac's efforts with servicers and homeowners are critical to preventing unnecessary foreclosures and to keeping people in their homes."

HAMP also drove significant increases in the number of other types of foreclosure prevention activity.  Borrowers who are found to be ineligible for HAMP because their debt to income ratio is already below the 31 percent goal for HAMP modifications or for other reasons are being referred to other plans.  This includes forbearance where the servicer agrees to reduce or suspend payments for a defined period of time, up to six months or repayment plans where the homeowner is given a defined period of time to reinstate his mortgage by making regular payments plus an additional amount to make up for missed payments.  Forbearances more than doubled in the second quarter to 121,500 and repayments plans increased by 39 percent to 140,600.

Short sales increased by 45 percent to 11,700 and this change, fostered by an increase in delegated authority by the GSE's to servicers along with the trial period requirement accounted for a drop in completed home retention actions from 90 percent of all foreclosure prevention actions to 82 percent during the quarter.

The GSE's are looking forward in an attempt to prevent a recurrence of the current mortgage situation.  Along with the borrower's equity in the property and his delinquency history, credit scores at origination continue to be a major predictor of the likelihood of future problems.  At the end of last June one in 8 loans or 11.8 percent of those where the borrower's credit score at origination was less than 660 were delinquent compared to three in 100 (3.0 percent) with scores of 660 or more.

In light of these figures, the GSEs are moving to increase the credit quality of new business.  Since December 2008 the original weighted average credit score of the total portfolio has increased from 724 to 727 and the percentage of that portfolio with an original credit score of 660 has decreased from 4.9 to 4.7.

HAMP has not yet been in operation long enough to judge its effectiveness.  The first loans to enter the program have only recently emerged from the 90-day trial period so there are no meaningful figures on the trial completion rate or any number on the overall success of the program.  With continuing economic weakness and increasing unemployment HAMP and other foreclosure avoidance programs have a tough row to hoe.