State Regulator's Group Finds Loan Mitigation Efforts "Disappointing"

The third quarterly report of the State Foreclosure Prevention Working Group was issued on Monday by the Conference of State Bank Supervisors (CSBS.)  The group was established to assess the performance of the servicers in working to mitigate foreclosures.

The working group which was established in September 2007 and led by representatives of the Attorneys General of 11 states, two state banking departments and CSBS collected data from 13 of the 20 largest subprime mortgage servicers representing 60 percent of outstanding subprime loans.  The most recent report, which is the third issued by the group, covers the period from February through May of this year.

The group's findings are not encouraging.

The report concluded that industry measures to keep homeowners out of foreclosure have slipped.  "Nearly eight out of ten seriously delinquent borrowers are not on track for any loan work-out or loss mitigation assistance to enable them to avoid foreclosure."  This is a notable increase over what was reported in May when seven out of ten homeowners were in this situation; 40,000 fewer loans were in loss mitigation in May than in January.

"Too many homeowners face foreclosure without receiving any meaningful assistance by their mortgage servicer," the report said, "a reality that is growing worse rather than better, as the number of delinquent loans, prime and subprime, increases."

The working group also found that new efforts to prevent foreclosures are on the decline, in spite of a temporary increase in loan modifications in the 2nd Quarter of 2008.   The number of homeowners working toward a loan modification has fallen to the lowest level since late in 2007. This 28% decline of loan modifications in process between January and May stands in stark contrast to the 51% increase in loan modifications closed over this same period.  The report concludes that this decline in new mitigation efforts suggests that loan modification approaches have now been tailored to a limited group of homeowners.  Instead of expanding loan modification for a broader set of homeowners, mitigation efforts are being focused on selling homes before foreclosure.  In January, modifications in process outnumbered short sales in process by four to one; in May, that ratio had dropped to two to one.

Another report finding was that one out of five loan modifications made in the past year is currently delinquent.  Thus it would appear that a significant number of modifications offered to homeowners have not been sustainable.  Recent reports indicate that many loan modifications are not providing any monthly payment relief to struggling homeowners.   The report expressed a concern that unrealistic or 'band-aid' modifications have only exacerbated and prolonged the current foreclosure crisis.

Three hundred thousand subprime loans were in the process of foreclosure as of the end of May 2008.  This represents thirty-eight percent (38%) of seriously delinquent subprime loans with over 131,000 foreclosures completed on subprime loans in May

The third quarterly report concluded:  "While some progress has been made in preventing foreclosures, the empirical evidence is profoundly disappointing."

"Servicers appear to have reached the 'low-hanging fruit' of subprime loans facing interest rate resets, while not developing effective approaches to address the bulk of subprime loans which are in default before interest rate resets.  Based on the rising number of delinquent prime loans and projected numbers of payment option ARM loans facing reset over the next two years, we fear that continued reactive approaches will lead to another wave of unnecessary and preventable foreclosures.

"The number of loans on track for a loan modification has declined precipitously" in recent months.  The mortgage industry's failure to develop systematic approaches to prevent foreclosures has only spurred declines in property values and further increased expected losses on mortgage loan portfolios," according to the state officials' new report.

"While we focus this week on the historic legislative changes underway to address the liquidity crisis impacting the entire financial market, we can not lose sight of the continued crisis facing homeowners across the country at risk of losing their homes," said Richard H. Neiman, Superintendent of Banks for New York and a member of the working group.  "We will never succeed in righting the economy and stabilizing the markets, unless all institutions, regardless of charter type, work together to implement sustainable solutions to avoid unnecessary foreclosures."