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Staggering Re-Default Rates on Modified Loans

Q4 30-day delinquency 13.7% in mortgage metrics report

March 25, 2010

By staff

A spike in seriously delinquent loans pushed overall residential delinquency higher at financial institutions. Deterioration on subprime loans, however, was less severe than on other loan types. Meanwhile, nearly two-thirds of modified loans are re-defaulting within nine months of modifying -- though the re-default rate significantly subsides for modified portfolio loans.

Residential delinquency of at least 30 days, including foreclosures, was 13.7 percent as of Dec. 31, 2009, at federally insured thrifts and banks, according to the fourth-quarter 2009 OCC and OTS Mortgage Metrics Report. Delinquency rose for the seventh consecutive quarter from 12.8 percent three months earlier and 10.1 percent a year earlier.

The report reflected performance data on first-lien residential mortgages serviced by national banks and federally regulated thrifts. Most of the biggest U.S. servicers' first-lien portfolios are covered, and the 34 million loans for nearly $6 trillion included in the report account for more than 64 percent of all U.S. mortgages.

The latest increase was driven by deterioration with seriously delinquent loans -- which includes loans at least 60 days past due but not in foreclosure. Serious delinquency climbed to 7.1 percent from the 6.2 percent in the third quarter. At 3.4 percent, the 30- to 59-day rate was unchanged -- as was the 3.2 percent foreclosure rate.

Late payments on government-guaranteed loans rose to 17.30 percent from 17.00 percent at the end of September and 15.80 percent at the end of 2008. While seriously delinquent government mortgages rose 40 BPS and foreclosures-in-process were up 30 BPS from the third quarter, the 30- to 59-day rate improved 40 BPS.

On loans owned or managed by Fannie Mae and Freddie Mac, overall delinquency jumped to 8.7 percent from the third quarter's 7.9 percent. Delinquency on payment-option adjustable-rate mortgages was increased to 33.7 percent from 32.3 percent and

Looking at just serious delinquency, the rate on prime mortgages -- loans where the borrower has a credit score of at least 660 -- increased more from the third quarter than any other category: 16 percent. Serious delinquency on prime loans was up 75 percent compared to a year ago -- also worse than any other category.

The best performing category, however, was subprime, which includes loans with credit scores under 620. Subprime delinquency was 11.2 percent worse than the prior quarter, compared to 13.8 percent worse for all mortgages.

Foreclosures were filed on 312,529 properties during the latest period, falling from the third quarter's 369,209 but climbing from the fourth-quarter 2008's 262,691. The decline from the previous quarter was propelled by prime mortgages, which saw foreclosures decline to 147,419 from 179,087, though subprime foreclosures fell to 63,400 from 81,721.

For all of last year, around 1,421,531 foreclosures were filed, worse than 1,113,054 filed in 2008.

The level of foreclosures-in-process also fell, to 1,079,386 from 1,091,620 on Sept. 30, 2010. The foreclosure inventory was at 695,239 a year earlier.

Real-estate-owned filings rose to 128,859 in the fourth quarter from 118,606. In the fourth-quarter 2008, REOs numbered 94,942. REO activity was fueled by subprime foreclosures, which increased 15 percent, and prime mortgages, which expanded to 62,243 REOs from the third-quarter's 57,739.

Full-year 2009 REO filings climbed to 444,141 from 409,799 during 2008.

The report indicated that 15 percent of loans modified in the third-quarter 2009 had already re-defaulted and were at least 60 days past due.

The re-default rate three months after modification soared to 35 percent for loans modified in the third-quarter 2008. Even more staggering for the third-quarter 2008 vintage modifications was the 61 re-default rate within 12 months of modification

On modifications that were at least nine months old, re-defaults had occurred on more than half of all vintages.

The worst re-default rates were on government-guaranteed loans, with 60-day delinquency at 64 percent on loans modified nine months earlier. But less than one-third of modified portfolio loans had re-defaulted rate after nine months:.

Looking at 30-day delinquency on modified loans, the re-default rate jumped to more than 63 percent for loans within nine months of modifications. Within 12 months -- the re-default rate rises to around 70 percent.

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