While industry and government news releases emphasize the declining rates of delinquency and foreclosure, the declines remain agonizingly slow. Yes, serious defaults on mortgages are down from their peak in 2010. On the other hand, there have been 4.5 million completed foreclosure sales since 2007 and there are still between 4 and 5 million mortgages delinquent or in foreclosure now. Defaulted mortgages are still considerably more than 10% of all mortgages, at least double the rate in normal times, and the foreclosure inventory is still at about quadruple the pre-crisis rate. There are many ways to extrapolate the trends, depending on whether you use quarter-over-quarter changes or year-over-year changes, but we undoubtedly have years to go before the foreclosure crisis can be declared over.
The good news is that the performance of modifications continues to improve, according to the latest OCC mortgage metrics. As more and more modifications reduce interest rates and payments, and even principal, the number of re-defaults steadily and continually goes down. Only 22% of 2011 modifications later went seriously delinquent or were foreclosed.
Principal reductions were included in 10% of all modifications in the 2nd quarter of 2012. The 10% number masks some interesting variations. Principal write-downs were featured in 20% of HAMP mods versus about 7% of in-house mods. Bank regulators and FHFA clearly have different views on the soundness of principal reductions; banks are writing down principal on 28% of their portfolio loan mods and 16% for private securitized loan mods, while principal reduction for Fannie and Freddie mortgage mods remain at 0%.
Interestingly, the OCC attributes the slow decline in completed foreclosure sales to “servicers holding loans in the foreclosure process for longer periods of time in an effort to accomplish alternate loss mitigation or home forfeiture actions.” There is no mention of state laws. The states with the most modifications are, in order, California, Florida, Illinois, Texas, New York, Georgia and New Jersey. FHFA is proposing to surcharge new mortgages in four of those states.