Foreclosure Frauds and Scams

ANALYSIS OF  SUBPRIME MORTGAGE SERVICING PERFORMANCE

DATA REPORT NO. 1   JANUARY 2008

STATE FORECLOSURE PREVENTION  WORKING GROUP

Executive Summary

In the summer of 2007, the state attorneys general and state banking regulators formed the State Foreclosure Prevention Working Group to work with servicers of subprime mortgage loans to identify ways to work together to prevent unnecessary foreclosures. The touchstone of the State Working Group is to work to prevent those foreclosures where the homeowner has the desire and reasonable ability to make payments on a mortgage loan and the investors that own the mortgage loan have a financial incentive to modify the loan rather than incurring the significant costs and likely greater losses from foreclosing on the loan. In our experience with homeowners in our states, unnecessary foreclosures had been occurring all too often because the system for servicing subprime mortgage loans was not designed to conduct large numbers of loan modifications or other work-outs for homeowners in distress.

The State Working Group collaborated with industry and federal regulators to develop a uniform data reporting format to collect data to measure the extent of the foreclosure problem and the servicers’ efforts to respond to it. As state officials, we believe that objective data is necessary to make informed policy decisions and to promote initiatives that could reduce foreclosures. In addition, we believe the public has a right to know how servicers are managing the foreclosure crisis. This report is our first effort to provide the public with data on servicer activities. Our key findings are:

1.       Seven out of ten seriously delinquent borrowers are not on track for any loss mitigation option. The lack of interaction between mortgage servicers and homeowners remains a major problem. While servicers have developed creative outreach efforts and increased staffing, the data shows a large gap between the number of homeowners needing loss mitigation and the number currently receiving assistance. Our data suggests that a rising number of loan delinquencies are outpacing the increase in loss mitigation efforts.

2.       Servicers have increased their use of loan modifications and other home retention options.  For those delinquent homeowners in contact with servicers, almost half (45%) are working toward a loan modification. Servicers are increasing their use of longer-term changes to the mortgage loan versus their earlier reliance on short-term repayment or forbearance agreements.

3. Payment resets on hybrid ARMs have not yet been a driving force in foreclosures. A significant percentage of subprime adjustable rate loans are delinquent before they experience payment shock from their first adjustment, reflecting weak underwriting or fraud in the origination of the loan. With so many homeowners struggling to stay afloat prior to rate resets, we need to act quickly to address these hybrid ARM loans before the payment shock due to the rate reset triggers further foreclosures.

4.       Homeowners are helping themselves. Most delinquent loans resolved in October 2007 occurred due to the homeowner catching up on back payments. As of October, actions by homeowners, not servicers, have prevented the most foreclosures.

5.       The refinance option has nearly evaporated. Historically, serial refinancing was the primary way that the mortgage industry and homeowners managed delinquencies in subprime loans. Despite recent interest rate cuts, the mortgage industry will not be able to refinance its way out of this crisis absent dramatic changes in available loan products or a reversal in home price declines.

We reach these preliminary conclusions based on somewhat limited data. Some major national banks that service subprime loans have declined to provide the State Working Group with data based on advice or direction from the Office of the Comptroller of the Currency. Another federally-chartered thrift refused to provide data based on its participation in the industry-led HOPE NOW data collection effort. We call on the OCC to urge national banks to report data to the State Working Group, so that we will be able to provide a complete picture of the subprime servicing market.

In addition, we renew our calls for systematic, long-term solutions to efficiently deal with  subprime loans originated in recent years. While there is an industry-led effort to identify a set  of loans for “fast track” modifications, we believe this effort only scratches the surface of the  need for a more efficient and systematic approach. A continued insistence that each delinquent loan needs intensive one-on-one attention will hamstring efforts to prevent large numbers of foreclosures. As a result, millions of homeowners will lose their homes unnecessarily, impacting not only those families, but their neighbors and communities as well. We must do better.

The Foreclosure Fraud Alert Website http://www.foreclosurefraudalert.com/

The Foreclosure Fraud Alert Blog  http://www.foreclosurefraudalert.com/fraudblog

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