While banks and government agencies are increasing efforts to save troubled home loans, the attempts thus far have not slowed a rise in foreclosures, according to a report released this week by the Offices of Thrift Supervision (OTS) and Comptroller of the Currency (OCC).
Serious delinquencies (60 days or more past due) rose to 6.2% in the third quarter from 5.3% in the previous quarter. There are 1 million mortgages in foreclosure, an increase of 100,000 during the quarter, and about 3.2% of the portfolio covered by the report - roughly 65% of outstanding mortgages in the U.S.
Many lenders and collection agencies tell Collections & Credit Risk they are adding collectors and earmarking training resources to better service accounts that continue to flow from the mortgage business. Many employees previously in loan underwriting, hired when credit was flowing, have been taught to collect the loans they once issued.
At the same time, the crushing amount of collections to be handled has pushed some lenders to outsource a portion of the growing volume of work. Lenders still seem to favor sending out early-stage collections, according to Collections & Credit Risk research. They prefer to keep actual defaults and foreclosures in-house in order to nurture a relationship with borrowers to get at least some return.
For the greater economy, there are a few positive signs amid otherwise bleak foreclosure data.
Banks and thrifts in the third quarter ended Sept. 30 implemented twice as many new home retention actions as foreclosures. Specifically, servicers implemented more than 680,000 home modifications and payment plans in the quarter aimed at preventing foreclosures - including 275,000 trial modifications initiated under the Home Affordable Modification Program (HAMP) and 406,000 other foreclosure prevention actions. The numbers increased 67% from the second quarter, according to the government agencies' Mortgage Metrics Report. For every six home-loan borrowers who were seriously delinquent or in foreclosure, about one borrower received a permanent or trial loan modification.
Current and performing mortgages in the portfolio covered by the report, even withthe uptick in modifications, dropped to 87.2% compared to 88.6% in the second quarter. It marks the sixth consecutive quarter that performance declined. One year earlier, in Q3 2008, 91.5% of the portfolio was listed as current and performing.
While some trends in the U.S. housing market have been more positive in recent months - low mortgage rates luring new buyers and stable home prices - the survey sends a sobering signal and indicates the housing market may continue to have a large inventory of distressed properties for sale in the year ahead. This includes both sales of bank-owned properties, and lender-approved short sales, in which the sales price fails to cover the outstanding balance on the loan.
Wherever the collections work is directed, more should be on the way. The real estate firm First American CoreLogic estimates that nearly 1 in 4 home loans nationwide is "under water," with a balance larger than what the house could currently sell for. Policymakers hope to stabilize the housing market using several strategies, including working with the Federal Reserve to keep mortgage rates low, although it is possible that rates could rise as the Fed backs off from its program of buying mortgage securities next year.
The Obama administration is expected to continue encouraging lenders to reduce defaults through loan modifications but it is unlikely the re-default rate on modifications will slow in the coming months because of the troubled economy, high unemployment and the trend of under-water borrowers choosing to walk away from their mortgages.
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