Office of the Commissioner of Financial Regulation


Redefault Rates on Loan Modifications Actually Improving Says State Foreclosure Prevention Working Group


Without Greater Emphasis on Principal Reduction and Stronger Foreclosure Prevention Programs, Foreclosures Will Continue to Significantly Outpace Efforts

(BALTIMORE, 8/24/10): While the number of foreclosures continues to seriously outpace the number of loan modifications being made, there are reasons to be optimistic about the performance of those loan modifications. According to a report issued today by the State Foreclosure Prevention Working Group, recent loan modifications are performing better than modifications made earlier in the mortgage crisis.

Differing from some analysts that have predicted redefault rates as high as 65% or 75%, the State Working Group stated that the improvement in loan modification performance over the past year actually suggests that we will see lower redefault rates in the future. According to the data the group has collected from nine mortgage servicers, loans modified in 2009 are 40% to 50% less likely to be seriously delinquent six months after modification than loans modified during the same time period in 2008.

The Office of Thrift Supervision (OTS) and the Office of the Comptroller of Currency (OCC) recently reported a similar reduction in redefault rates in their Mortgage Metrics Report for the Fourth Quarter of 2009. The agencies reported that 48.1% of the loans modified in the third quarter of 2008 were 60 or more days delinquent six months after modification, but only 27.7% of the loans modified in the third quarter of 2009 became delinquent - a redefault rate drop of more than 40%.

The redefault rate is even lower for loan modifications that had significant principal reduction of more than 10% of the principal balance. A comparison of modifications with principal reductions made in August and September 2008 to modifications with principal reductions made in August and September 2009 showed that redefaults fell from 35.4% to just 12.9%. The State Working Group believes it is important for servicers to increase their strategic use of principal reduction to maximize the long-term success of loan modifications.

"In Maryland, our servicer reporting revealed in late 2008 that the majority of loan modifications were actually resulting in higher monthly payments - which, not surprisingly, led to failure," said Mark Kaufman, Deputy Commissioner of Financial Regulation and Maryland's representative to the State Working Group. "As modifications have resulted in substantive payment reduction, we are pleased to see the success rates improve."

However, the State Working Group noted that despite the progress made on the sustainability of the loan modifications being made, far too many seriously delinquent loans were still not in any form of loss mitigation. Without improvements to foreclosure preventions efforts, the group anticipates that hundreds of thousands of these seriously delinquent homeowners could end in foreclosure.

"This is precisely why Governor O'Malley has led the effort to develop and implement the new mediation program in Maryland," said Alex Sanchez, Secretary of the Department of Labor, Licensing and Regulation. "It is critical to ensure that alternatives to foreclosure, including loan modifications as well as short sales and other potential solutions, are fully explored."

Other Working Group findings include:

  • foreclosures continue to outpace modifications - 6 out of 10 seriously delinquent borrowers are still not in any loss mitigation activity;
  • the majority of loan modifications (89.3%) tracked by the Working Group for the first quarter of 2010 showed some reduction in payments, and 77.6% lowered the monthly payment by more than 10%;
  • only 21.2% of loan modifications actually reduce the loan's principal amount;
  • permanent loan modifications dipped in 2009 as servicers transitioned to HAMP.

The State Foreclosure Prevention Working Group, which consists of 12 state attorneys general (AZ, CA, CO, FL, IL, IA, MA, NV, NC, OH, TX, WA), bank regulators for NY, NC, and MD, and the Conference of State Bank Supervisors, was founded in 2007 and has issued four prior reports.