The nation's eight largest mortgage lenders are reporting a dramatic drop in problem loans from a year ago due to a strengthening economy and the transfer of bad loans to other servicers.

The good news is that the percentage of loans that were seriously delinquent and in the process of foreclosure fell to 7.2% at March 31, from 8.6% a year earlier, the Office of the Comptroller of the Currency said in a report released Thursday.

But some of that improvement came from the sale or transfer of poor-performing loans to servicers that are outside the federal banking system. Many of those loans remain delinquent, they are just no longer the banks' problem. Overall, the banks shed nearly 10% of loans in their portfolio from a year earlier, the OCC says.

"The portfolios for our reporting banks are smaller," Kathy Gouldie, the OCC's lead credit expert, said on a conference call discussing the agency's quarterly Mortgage Metric report. But "there is still a big slog of foreclosure actions moving through the foreclosure process."

"There are a lot of things we don't know about properties in foreclosure, including whether they are on the market and the bank has not yet foreclosed, but the current owner may still be trying to sell that property on their own," added Morris Morgan, the OCC's deputy comptroller for large bank supervision,

The report covers loans owned or serviced by eight institutions: Bank of America (BAC), Citigroup (NYSE:C), JPMorgan Chase (JPM), HSBC (HSBC), OneWest (formerly IndyMac), PNC (PNC), U.S. Bancorp (USB), and Wells Fargo (WFC). These banks and thrifts represent 55% of the overall $4.7 trillion mortgage market and own roughly 9 million of the 28 million mortgages covered by the OCC's report.

The percentage of mortgages that were current at the end of the last quarter and were owned outright by the eight banks was 86.3%, up from 83.5% a year earlier, the report found. The percentage of those loans that were seriously delinquent and in the process of foreclosure fell to 10.3% in the first quarter from 13.1% a year earlier.

By comparison, just 3.8% of loans backed by Fannie Mae and Freddie Mac were seriously delinquent and in the process of foreclosure in the first quarter, down from 4.7% a year earlier.

The report found a wide variance in redefault rates. Loan modifications on mortgages owned by banks and those serviced for Fannie Mae and Freddie Mac performed far better than loans insured by the Federal Housing Administration or owned by private investors.

Forty-seven percent of government-backed loans, which includes loans serviced by the FHA and the Veterans Administration, redefaulted a year after being modified and that figure rose to 53% after two years and 59% after three years.

By contrast, loans owned by banks had the lowest redefault rates of 22% after the first year, 28% after the second year, and 32% after three years.

Fannie- and Freddie-backed loans had redefault rates of 24% after one year, roughly 30% after two years and roughly 35% in the third year. Redefault rate on loans owned by investors was significantly worse — 41% after the first year, 51% after the second year and 57% after the third year.

Loans owned by banks and serviced for Fannie and Freddie tend to be higher-quality prime loans compared to private-label loans, which were largely subprime or Alt-A, and FHA loans to lower-income borrowers with low down payments.

Overall, servicers have modified more than 3 million mortgages since 2008 and of those nearly 50% were current or paid off in the first quarter. Roughly 12% were seriously delinquent, 7% were in the process of foreclosure and another 7% had already been foreclosed upon.

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