Payment resets appear to have little impact on nonprime defaults, according to a new report that also indicates fewer loan modifications are being started as serious delinquency is rising. But delinquency of between 30 to 59 days has moderated.
Those were the findings from the Analysis of Subprime Mortgage Servicing Performance released by the State Foreclosure Prevention Working Group -- a group of state attorneys general and state banking regulators. The analysis follows a report from January, which analyzed activity from October 2007, and another in May, which analyzed activity from October 2007 to January 2008.
The findings were based on data submitted from 13 of the largest U.S. mortgage servicers for activity from January 2008 through May 2008. The data reflected activity on around 4.6 million subprime loans representing approximately 57 percent of the subprime market.
The latest analysis indicated that delinquency of between 30 and 59 days has remained below 7 percent, around where it stood in October and slightly lower than in January. But delinquency of at least 90 days has risen from just above 10 percent in October to more than 13 percent in the most recent study.
Many subprime borrowers are defaulting well in advance of the first payment resets, with one-third of borrowers who face initial resets in the third quarter of next year already being delinquent as of May. The default rate of pre-reset delinquency was 29 percent in January and 22 percent in October.
But defaults on nonprime loans within three months of the first reset was just over 4 percent in the latest study.
"This continuing trend of a significant portion of ARM loans being delinquent well in advance of the initial reset date confirms earlier assessments that unsound loan products, weak underwriting and mortgage origination fraud have been the primary causes of the crisis in subprime mortgage lending," the latest study said.
Total delinquency as of May ranged from around 13 percent to approximately 34 percent among the 13 individual servicers. Looking at just delinquent borrowers, the share in foreclosure ranged from 20 percent to 50 percent.
The number of loans in the process of foreclosure was 305,000 in May, climbing 2 percent from January and 11 percent from October 2007. Completed foreclosures were 131,000 in May, soaring 28 percent from October 2007.
The analysis found that nearly eight out of 10 seriously delinquent loans are headed for foreclosure sale, worse than seven out of 10 in the prior reports. And while completed loan modifications rose 51 percent between January and May -- reflecting a spike in new modifications during January and February -- loan modifications started fell by 28 percent. In May, there were just two modifications in process for every short sale in process, falling from four-to-one in January.
Of loans that were modified during the past year, around one-in-five are currently delinquent. The report noted this is at least partly due to the lack of payment reductions in modifications.
"While some progress has been made in preventing foreclosures, the empirical evidence is profoundly disappointing," the report said. "Too many homeowners face foreclosure without receiving any meaningful assistance by their mortgage servicer, a reality that is growing worse rather than better, as the number of delinquent loans, prime and subprime, increases."
The group called on more servicers to adopt the model implemented on delinquent IndyMac loans by the Federal Deposit Insurance Corporation.