Since late last year, state and federal regulators have concluded in separate reports that current loan modification plans aren´t working, but it´s amazing how long they´ve taken to look for a reason why. As they bickered, however, private sector monitoring of loan mods accelerated.
The Office of the Comptroller of the Currency and the Office of Thrift Supervision, in their joint quarterly report released early last month, noted that the rate of re-defaults had risen for loans modified in 2008 until it neared 50% for modifications done in the second half of the year as if it were shocking news. Comptroller John Dugan sent out embargoed copies of the report to journalists more than a full day before its official release in an attempt to field their inevitable questions in a more organized fashion.
But it was the second time the joint report had pointed to a high re-default rate as evidence that the loan modification plans banks had adopted weren´t working. Few of the report´s recipients were surprised. Regulators had already sparred over that data.
After the first indication of the trend, in December, Federal Deposit Insurance Corp. Chairman Sheila Bair, a strong proponent of loan modifications, responded defensively to comments by Dugan that seemed to suggest that the idea of pressing for loan modifications was itself flawed.
Just a few weeks later, in February, the State Foreclosure Prevention Working Group, a consortium of state regulators that began monitoring 13 major mortgage servicers in late 2007, also claimed the modifications performed weren´t working. But it added that the OCC and OTS joint data didn´t seem accurate, either.
This back-and-forth amounted to a regulatory squabble from which few useful decisions emerged. Of the regulators, Bair seems to have picked up on the distinction over monthly payment reductions before her peers. When the OCC released its April report, showing the 50% re-default rate, Bair pointed out that "the report does confirm that modifications that reduce monthly payments have a substantially lower re-default rate than other modifications." She added, "Re-default rates were much lower for loans where the monthly modified payment dropped by 10% or more-22.7% of such loans were 60-plus days delinquent after 6 months. This figure is much more in line with FDIC estimates when the modification is affordable and sustainable."
By this time, private sector criticism of the government´s monitoring efforts was well underway. Rod Dubitsky, the managing director of the asset-backed securities division at Credit Suisse, began calling for better data collection on loan modification efforts last October, after his team determined that none of the reports published by government agencies contained enough detail.
"Despite all the discussion of modifications, we believe there is relatively little publicly available data addressing modified loan re-default rates, particularly controlling for vintage and modification type," an Oct. 1 report read. "Our data shows that certain mods perform better than others, and therefore the `one size fits all´ approach to loan modification dialogue needs to be dramatically rethought."
In an interview, Dubitsky told American Banker, "Long ago, I think the government should have had a housing recovery task force that had experts on collections and a team of data experts who could crack the data." He said that reporting requirements that the Obama administration´s plan will establish will greatly improve the granularity of the data, but the effort could still be improved. "While this is being done, as near as I can tell there isn´t a centralized effort," he said.
Dubitsky´s team cut right to the chase in a March 30 report that offered a look at the percentage of loan mods performed by each of the 15 largest loan servicers that lowered monthly payments. The breakdown also helpfully highlights which servicers performed modifications that actually involved principle reductions.
The most recently updated public effort, which came from the Federal Housing Finance Agency, fell far short of this goal.
The FHFA, which compiles a report of loan modifications performed by Fannie Mae and Freddie Mac, added new points to provide more detail. But though the agency proudly highlighted the new information it was revealing, there still didn´t seem to be much recognition of the importance of lowering monthly payments.
A majority of the Fannie and Freddie loan mods-65% of them-involved a reduction in the interest rate and an extension of the term of the loan. Meanwhile, 25% had either their interest rates reduced or their terms extended, but not both. The remaining 10% were classified as "Other (includes Capitalization of Arrearages)," a category nebulous enough to offer almost no insight into the question of payment reduction. (Just in case you were waiting for this, the percentage of principal reductions, was 0).
The FHFA said it would continue to add new data points to its monthly reports in the future, and the Obama administration is expected to implement a much stricter monitoring program alongside its foreclosure prevention plan. But whether the information will be made public remains to be seen. The best information on loan mods may still be scanned by private eyes.