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: CL&P Blog

Update - January's Subprime Mortgage Modifications

By Alan White

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By Alan White

Mortgage modifications in January continued converting risky subprime loans into risky modified loans. Negative amortization and temporary rate reductions with future rate shock remain common in modifications. Here is my summary of the January 25 investor reports (covering the 12/26/08 to 1/25/09 period).

Mortgage modifications increased in January 2009, but payment and balance increases still predominate. There were 23,224 mortgage modifications in January in a database of 3.4 million subprime and alt-A mortgages, up from 20,391 in December and 19,112 in November. Modifications increasing loan balances still dominate, with 89% of modifications involving some capitalization of arrears, and only 12% involving any write-offs of principal, interest or fees (See data tables). Monthly payment reductions accounted for 49% of all modifications, essentially unchanged from November and December, while 13% of modifications did not change the payment and 38% increased the payment.

Investors lost $3.8 billion from foreclosure sales, compared with $73 million from write-downs in connection with mortgage modifications. Looking only at the 12% of modified loans with write-offs, the average write-off was $26,000, or about 13.5% of the original loan amount. For liquidated foreclosures, the average loss was $130,000, representing about 61% of the original loan amount. There were more than ten times as many foreclosure liquidations as modifications with any write-off. The ratio of foreclosure losses in dollars to modification write-downs was 52 to 1. (table 8).

Delinquencies, foreclosures in process, liquidated foreclosures, and foreclosure loss severities all continued their upward trends from prior months. As of January 25, 2009, roughly 31% of subprime and alt-A mortgages were 30 days or more delinquent, and roughly 69% were current (table 2). Foreclosures in process were 7% of the total, with 2% in bankruptcy and 4% in REO (table1). There were prepayments on 1.8% of mortgages for the month, but nearly half of the prepayments were liquidated REO, i.e. foreclosed homes sold, usually at a loss. The remaining half of prepayments would be refinancings or sales.

Note that this database does not provide numbers of new foreclosure filings, so that there is no simple way to verify recent reports that new foreclosure filings were down significantly in January. It is possible that despite the growth in delinquencies, new foreclosure starts declined, which would result in a larger number of delinquent loans not currently in the foreclosure process. The increase in modification activity, while not dramatic, could account for some of the decline in new foreclosure filings.

Full post as published by CL&P Blog on February 13, 2009 (boomark / email).