Gap Widens Between Prime, Subprime Borrowers

New data released this week by the HOPE NOW coalition of servicers, lenders and investors shows clearly that while the nation’s foreclosures decreased during November, the disparity of available help between subprime and prime borrowers continues to grow. According to the group, just 69,075 foreclosures were completed during November nationwide, down 13.9 percent from Oct.’s totals; the drop reflects a strong push to enact voluntary and involuntary foreclosure moratoriums in key housing states. With the extra time, it’s clear that servicers are working to modify more loans for troubled subprime borrowers, too. HOPE NOW’s data shows that despite the sharp monthly drop in foreclosure volume, the number of modified subprime mortgages actually rose slightly in November, from 73,211 in Oct. to 73,592 in Nov. The number of subprime borrowers receiving repayment plans fell sharply, however, dropping 19.8 percent. As has been the case throughout the evolving mortgage mess, however, an increased focus on the needs of troubled subprime borrowers appears to have left prime-credit borrowers out in the cold. While the number of subprime loan modifications rose slightly, the number of prime loan modifications fell dramatically during Nov., dropping 15.2 percent; the drop shows that the disparity in available help options is clearly tilted towards subprime borrowers. Does a single servicer matter? Such a reported disparity, however, may have more to do with how a single servicer can influence the HOPE NOW data set, rather than reflecting a real difference market-wide in available help for prime and subprime borrowers. In particular, the apparent rise in industry-wide modifications among subprime borrowers could be an artifact of recent efforts by Ocwen Financial Corp. (OCN) and a few other key servicers — Litton and Nationstar among them — to modify the subprime loans in their respective portfolios. Such an effort may be skewing HOPE NOW’s numbers, although the coalition generally does no discuss the reliability or variability of its data between individual servicers. A recent report by Credit Suisse‘s Rod Dubitsky notes that the the servicer variation in the use of loan modifications among subprime borrowers can be dramatic: some servicers are employing loan mods to a much greater extent than others, with the three servicers above clearly dominating the loan modification push thus far among subprime borrowers. Equally variable is the rate at which servicers have ramped up their modification efforts throughout the year, with Ocwen leading the charge; the Credit Suisse report notes that Ocwen more than quintupled modifications between Q1 and Q2 of this year, a trend that HousingWire‘s sources suggest has continued unabated into the back half of this year. All modifications are not created equal Beyond the raw effort to modify loans, it’s often the type of modifications that matter, as well. HOPE NOW doesn’t specify aggregated numbers for different classes of loan modifications — and the press (along with consumer groups) have since picked up on the meme, espoused here very early last year, that loan modifications are generally better than repayment plans for troubled borrowers. Which remains generally true. The particulars here, however, are far more nuanced than most realize. Dubitsky notes, for example, that more than 70 percent of the entire mortgage industry’s principal-reduction modifications to-date have been performed by Ocwen — which underscores the fact that not all modifications are created equal. Doubly so when you consider that the recidivism rate on principal-reduction mods is vastly different from other forms of modification, or that 1/3 of modifications actually increase borrower’s payments (and there are valid reasons for doing this, as well). The point here is that by lumping everything into loan modifications, and then comparing that to raw repayment plans, there is only so much market trending that can be seen — while we’ve been among the media outlets that used that tool as a rough hammer to pick out trends, at some point, even that sort of comparison begins to take on a black-and-white distinction that makes its use increasingly problematic. As Dubitsky notes: “There can be too much of a good thing, and some servicers could modify too much, while other servicers could be doing far too few mods.” The difference remains Regardless of what caused the disparity, however, the difference between modifications for prime and subprime borrowers is very real in the aggregate sense: the ratio of repayment plans to modifications for prime borrowers during November was 2.39 percent, while for subprime borrowers that ratio was 0.61 percent. What we don’t know is why this is the case: is it because a few subprime servicers, looking to save their own skin and recoup advances, are modifying loans are an amazing clip? Or is it because prime servicers are more comfortable using repayment plans as a front door to a workout, even if it means booking a loan as delinquent? There are other considerations here, as well, for much of the reported data: if servicers focusing on prime loans are indeed more likely to rely on repayment plans — for whatever reason — does that help explain why so many prime loans appear to be going bad so quickly? Does a strong modification focus by subprime servicers, in comparison, help explain why reported delinquencies in the sector aren’t rising as fast? Regardless, expect to see loan modification efforts increase dramatically next year, HOPE NOW executive director Faith Schwartz said. She said that the group expects to see the number of loan modifications double their 2008 totals next year, largely as servicers look to implement bulk loan-mod processing programs — programs that are, ostensibly, not limited to one credit sector or the other. Frankly, getting to that level of loan mods could be done by pushing the ratio of prime loan modifications to the same level we’re already seeing in the subprime space, although HOPE NOW didn’t comment on any planned strategy by servicers for modifications going forward. Schwartz also said the group intends to roll out “significantly enhanced loan-level data that will help the industry further analyze trends and make necessary adjustments,” as well. At HousingWire, our wish list for that data would include aggregate information on what type of loan modifications are being executed, as well as recidivism rates. It is Christmas-time, after all. Write to Paul Jackson at [email protected].