Modifications Score Big on FHFA’s Foreclosure Report Card

The volume of modifications completed by government-sponsored entities (GSEs) Fannie Mae (FNM) and Freddie Mac (FRE) rose 76 percent from Q308 to Q408, according to the quarterly Foreclosure Prevention Report issued Wednesday by the Federal Housing Finance Agency (FHFA). The agencies modified nearly 24,000 loans during the fourth quarter, according to the FHFA’s report, which studies the 30.7m first lien residential mortgages serviced on behalf of both GSEs as of year-end ’08. Prime mortgages made up 84% of the total combined portfolios, with the remainder qualifying as “nonprime.” At the end of November, 83.9% of the combined portfolios was considered prime; 83.8% was considered prime as of Oct. 31, 2008. The rate of serious delinquencies — those mortgages 90-or-more-days delinquent — among the agencies increased from 0.85% at year-end ’07 to 2.14% at year-end ’08, according to the FHFA’s report. The foreclosure sale suspension — implemented in late November 2008 and eventually extended to January 31– held some 12,631 loans in the credit portfolio that otherwise would have faced foreclosure. The retention of these properties in the portfolios caused a swell in the “seriously delinquent” bucket and reduced the volume of foreclosures by 27 percent in the quarter, the report found. Loss mitigation efforts among the delinquent loans varied in Q408, from modifications (34% of loss mit action) to completed payment plans (19%), and from short sales (8.9%) to deeds in lieu of foreclosure (0.8%). The overall loss mitigation performance ratio — or the percentage of mortgages likely to foreclose that entered some form of loss mitigation instead — increased to 65.7% in Q408 from 55% in Q308. The ratio was 54.2% among prime loans (from 45.1% in Q3) and 75.3% among non-prime loans (from 64.7% in Q3). Read a summary of the report. The spiking ratios of loss mitigation and modifications among seriously delinquent loans held by the GSEs, in concert with comments from FHFA’s director James Lockhart, indicate the FHFA’s faith in the loan modification system. Lockhart said Wednesday that a servicer “safe harbor” is not needed to process bulk loan mods; quite a change from legislation marinating on Capitol Hill that looks to give servicers just such immunity from investors, according to an interview with Dow Jones. “Obviously the investors don’t want [the safe harbor] done, and so my view is that we can work within the present system and get a lot of loan modifications done,” he said, according to the news service. Investor confidence and consumer awareness are the main obstacles in the path to increased modifications, while Lockhart said servicers “have more leeway than they’re using at the moment” to conduct modifications. Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.