Banks have been roundly criticized for shortcomings in their loan modification efforts, but executives said Wednesday that they are learning from their mistakes and experimenting with alternatives to help stressed borrowers.
If anything's become apparent from bankers' struggles with loan modifications, it's that banks need to get better at identifying which mortgage holders are best suited for workouts. Another plus would be developing other options to offer those whose credit profiles disqualify them.
Barbara Desoer, who runs the mortgage and insurance operations at Bank of America Corp., touted the Charlotte company's nearly 500,000 loan modifications in the past 13 months and unveiled a pilot program aimed at borrowers who fail to qualify for modifications.
B of A is testing a short-sale program that reaches out to struggling homeowners and real estate agents. The plan is to encourage short sales by offering the option to those customers, with a goal of helping them "transition to a different kind of housing that meets their needs," Desoer said.
Dan Poston, the chief financial officer at Fifth Third Bancorp, candidly discussed the Cincinnati company's early difficulties with its loan modification program. Nearly half of the credits in a $69 million block of mortgages that the bank modified in the first quarter of 2008 were at least 60 days behind before the year was out, he said.
But quarter by quarter, as Fifth Third has ramped up volume, 60-day redelinquency rates began to drop. Redelinquency rates on the bank's $146 million of third-quarter 2008 modifications peaked at around 40%, he said. More recent vintages have shown better results. Barring a sudden change in trajectory, 60-day redelinquencies of mortgages that originally went delinquent in the first quarter of 2009 will barely exceed 20%.
"We think we've improved [our program] over time," Poston said, though he didn't offer further detail. Even accounting for the company's rocky start, Fifth Third reported redefault ratios slightly better than industry averages and a third superior to loans held by Fannie Mae and Freddie Mac, he said.
Besides process improvements, a Fifth Third spokeswoman said the improved performance likely has to do with the creditworthiness of the borrowers in each stage of modification. When the company launched its modification program in 2007, it began with the borrowers with the worst default profiles. With each successive round of modifications, the credit profiles of borrowers, while still troubled, improved.
Despite the upbeat tones, the executives offered some caution.
Some of the Fifth Third's modified mortgages, while performing (in some cases for two years), are still considered at risk. The company will have to categorize them as troubled debt restructurings, Poston warned.
The overall lending environment is still bad, Poston said. And TDR-related chargeoffs in Fifth Third's consumer real estate book will likely rise to $200 million this year from $110 million in 2009, he said.
Desoer, who like Poston was speaking at a Credit Suisse financial services conference in Miami, also was reluctant to declare victory over losses in B of A's mortgage and home equity portfolios.
"We expect losses to move up and down" in mortgages, she said. "But it feels like we could be approaching a peak." The status of home equity losses, which narrowed 20.8% in the fourth quarter from a quarter earlier, remains unclear. "We are skeptical" home equity problems have peaked, she said. "Don't be surprised to see losses bounce around a little bit before we see sustained" declines.
Separately, Desoer addressed an investor question about Balboa Insurance Group, a former Countrywide unit that B of A has been evaluating since it bought the Calabasas, Calif., mortgage company. She said B of A has decided to keep Balboa's debt cancellation products and will continue to distribute insurance for other parties. Everything else will be shut down or sold, she said.