Evolving Modification Scene

An examination of credit union and bank modification trends.

 
 

With housing prices bouncing along the bottom and unemployment starting to fall, the outlook for 2012 is stronger than when we entered 2011. However, there are still millions of Americans who have not had a chance to take advantage of low interest rates by refinancing their mortgage or other debts, a fact highlighted by the Obama Administration last week.

Credit unions have been helping members stay in their homes without any external prodding. Each quarter, credit unions have added more real estate modifications to their books, although the pace has slowed from the rapid clip of modifications in 2008 and 2009.

In the first three quarters of 2011, credit unions modified just more than $2.5 billion in first mortgages and $377 million in other real estate loans, according to the Office of the Comptroller of the Currency’s Mortgage Metrics Report. These new modifications brought total balances outstanding of modified mortgages to $9.4 billion in September 2011. Just under 63% of all modified loan balances, including consumer and business loans, qualify as troubled debt restructures under current NCUA guidelines.

Total $ Volume Of Modified Real Estate Loans Outstanding
Data as of September 31, 2011
Callahan & Associates' Total $ Volume of Modified Real Estate Loans Outstanding
Source: Callahan & Associates' Peer-to-Peer Software.

Nationally, modified real estate loans make up 3.4% of the total real estate portfolio but the numbers vary widely on a regional level. Along with the sand states of Nevada (16.11%), Arizona (7.45%), Florida (6.63%) and California (6.10%), three other states have more than 6% of their total real estate loans outstanding in modified status: Utah (7.58%), North Carolina (6.99%), and Delaware (6.10%), according to the OCC report.

With some of the lowest unemployment rates in the nation, North and South Dakota have some of the lowest percent of their real estate loan portfolios modified, standing at 0.45% and 0.37% respectively in 3Q 2011.

Modified Real Estate Loans As A % Of Total Real Estate Loans
Data as of December 31, 2011
Roll over states to view percent values. Source: Callahan & Associates' Peer-to-Peer Software.

Reportable delinquency for mortgage loans has fallen over the past year. Nationally, modified first mortgage delinquency stands at 18.5%. The other real estate loans modified in delinquency fell to 14.1%, the lowest rate since credit unions started tracking the data in the third quarter of 2008. As with the percent of mortgages modified, re-default rates vary significantly by state with a handful of states exceeding 30% delinquency but others down in the single digits.

Reportable Delinquency For Modified Loans
Data as of September 31, 2011
Callahan & Associates' Reportable Delinquency For Modified Loans
Source: Callahan & Associates' Peer-to-Peer Software.

In more good news, fewer modified mortgages are entering delinquency. For both first mortgages and other real estate loans, the volume of loans entering the 1-to-2 month and 2-to-6 month stages of delinquency are declining.

How Are The Banks Doing?

The nation’s banks are seeing similar improvements in their modification efforts although they started from a much higher level of default, according to the OCC Mortgage Metrics report. Three years ago in the third quarter of 2008, re-default rates ranged from 22% to more than 45% depending on the “vintage” of the loan. A major factor in these failures was the banking industry’s reluctance to lower monthly payments. In 2008, less than 40% of modifications tracked by the OCC lowered the monthly payments. In first quarter of 2011, there was a significant jump in the types of “home retention actions” taken by the banks tracked in the OCC’s report. Trial period plans, rather than outright modifications, came into favor, most likely driven by the continuing high re-default rates of permanent modifications.

As of the third quarter of 2011, the range of re-default rates is significantly lower with nearly 90% of modifications lowering monthly payments. Loans just three-months into modifications showing a 10% re-default rate, going up to almost 26% for those modified over 12-months ago. Nationally, payments dropped by 24.4%, or $382 on average, with modifications under the Administration’s HAMP program delivering much more aggressive reductions. Modifications in that program dropped monthly payments an average of $567; non-HAMP modifications reduced payments by 17.5% or $262.

A borrower’s geography also dictated how aggressively the monthly payments might fall. In California, Florida and Nevada, over 60% of modifications lowered payments by 20% or more; the number was less than half that in South Dakota. In North Dakota, 20% of modifications actually increased the monthly payments, the highest proportion in the nation.

The OCC Mortgage Metrics report now also tracks what changes were made in the loan terms in these six categories:

  • Capitalization
  • Rate Reduction
  • Rate Freeze
  • Term Extension
  • Principal Reduction
  • Principal Deferral

The HAMP program emphasizes using three levers to improve the borrower’s ability to pay: capitalization of missed payments and fees, interest-rate reductions and term extensions. Fannie and Freddie do not offer modifications that include principal reduction but 15% of loans held by private investors and 18% of loans held in portfolio included principal forgiveness. Private investors were least likely to offer term extensions. On average, most institutions are choosing to alter between two and three different elements listed above.

How Often An Action Was Used In Modification Efforts
On average, two to three changes are made in the contract terms. | Data as of September 31, 2011
Callahan & Associates' How Often An Action Was Used In Modification Efforts
Source: OCC Mortgage Metrics Report, Third Quarter 2011.

NCUA’s recently proposed changes to troubled-debt restructure reporting and the FASB-IASB agreement to move from the incurred loss model to the expected loss model will significantly change the way credit unions are accounting for and reporting their efforts to help members pay off their debts. NCUA’s proposal will simplify the reporting of modifications to only include those classified as TDRs, about 60% of the total volume today.

On the other side, the NCUA is proposing an aggregate program limit which could mean credit unions turning away members or being forced to foreclose, rather than modify, a member’s loan if they are approaching their cap. This could hinder credit unions’ abilities to continue to help their members as the U.S. economy staggers back to life.

 

 

 

Feb. 6, 2012


Comments

 
 
 

No comments have been posted yet. Be the first one.