by Tanta on 1/18/2008 12:15:00 PM

The MBA has a report out on foreclosure and workout data from the third quarter of 2007 (thanks, Clyde!). The data is in tabular form that's a bit unwieldy, but here's part of the summary:

[D]uring the third quarter the approximately 54 thousand loan modifications done and 183 thousand repayment plans put into place exceeded the number of foreclosures started, excluding those cases where the borrower was an investor/speculator, where the borrower could not be located or would not respond to mortgage servicers, and when the borrower failed to perform under a plan or modification already in place.

Of the foreclosure actions started in the third quarter of 2007, 18percent were on properties that were not occupied by the owners, 23 percent were in cases where the borrower did not respond or could not be located, and 29 percent were cases where the borrower defaulted despite already having a repayment plan or loan modification in place. . . . the degree to which invest investor-owned properties drove foreclosures in the third quarter differed widely by state and by loan type. They ranged from a high of 35 percent of prime ARM foreclosures in Montana to a low of 6 percent of prime fixed-rate foreclosures in South Dakota. For the nation, investor loans comprised 18 percent of subprime ARM foreclosures, 28 percent of subprime fixed-rate foreclosures, 18 percent of prime ARM foreclosures and 14 percent of prime fixed-rate foreclosures. Table 6 shows, for example, that while 11 percent of foreclosures on prime ARM and prime fixed-rate loans were on non-owner occupied properties, the percentages for subprime loans were almost double that — 19 percent for subprime ARMs and 20 percent for subprime fixed-rate. In Ohio, a state that has had some of the highest foreclosure rates in the nation, investor owned properties accounted for 21 percent of subprime ARM foreclosures and 34 percent of subprime fixed-rate foreclosures, versus 18 percent of prime ARM and 14 percent of prime fixed-rate foreclosures. Nevada had among the highest investor-owned share of foreclosures, with investors accounting for 36 percent of subprime fixed-rate foreclosures, 18 percent of subprime ARM foreclosures, 24 percent of prime ARM foreclosures and 14 percent of prime fixed-rate foreclosures.

Borrowers who could not be located or who would not respond to repeated attempts by lenders to contact them accounted for 23 percent of all foreclosures in the third quarter, 21 percent of subprime ARM foreclosures, 21 percent of subprime ARM [sic; FRM?] foreclosures, 17 percent of prime ARM foreclosures and 33 percent of prime fixed-rate foreclosures. Thus, as a percent of foreclosures, the inability to get a borrower to respond to a mortgage servicer is a much bigger problem for prime-fixed rate borrowers than for subprime borrowers. Again the results differed widely by state and loan type. The highest was 69 percent for prime fixed-rate foreclosures in Oklahoma versus a low of 7 percent of prime ARM foreclosures in Wisconsin. Table 7 shows that in Ohio and Michigan, 25 and 26 percent respectively of all foreclosures started in those states were for borrowers who would not respond to repeated attempts to contact them or could not be located.

Borrowers who had worked with their lenders and established loan modification or formal repayment plans, and then failed to perform according to those plans, accounted for 29 percent of all foreclosures in the third quarter. The inability of borrowers to meet the terms of their repayment plans or loan modifications accounted for 40 percent of subprime ARM foreclosures, 37 percent of subprime fixed foreclosures, 17 percent of prime ARM foreclosures and 14 percent of prime fixed foreclosures. Table 8 shows that the states of Vermont, North Dakota, New Mexico and Arkansas, with little else in common, had the highest shares of foreclosures due to the inability of borrowers to live up to prior plans.

During the third quarter, mortgage servicers put in place approximately 183 thousand repayment plans and modified the rates or terms on approximately 54 thousand loans. Lenders modified approximately 13 thousand subprime ARM loans, 15 thousand subprime fixed rate loans, 4 thousand prime ARM loans and 21 thousand prime fixed-rate loans. In addition, servicers negotiated formal repayment plans with approximately 91 thousand subprime ARM borrowers, 30 thousand subprime fixed-rate borrowers, 37 thousand prime ARM borrowers and 25 thousand prime fixed-rate borrowers.
During this period the industry did approximately one thousand deed in lieu transactions and nine thousand short sales.

In an effort to put these numbers into context, Tables 9 through 13 also provide a comparison with the repayment plan and loan modification numbers. They show a breakdown of the number of foreclosures started net of those that clearly could not be helped due to reasons already discussed — investor-owned, borrower would not respond or could not be located, or borrower failed to live up to an agreement already in place. As previously discussed, the
percentages were adjusted downward to eliminate double counting for those borrowers who fell into more than one category. Therefore, while an estimated 166 thousand subprime ARM foreclosures were started during the third quarter, only 50 thousand did not fall into one of those three categories. In comparison, about 90 thousand repayment plans were renegotiated and 13 thousand loan modifications were done, for a total of 103 thousand.

Of the net 50 thousand foreclosures, many of these likely occurred due to the traditional reasons for default, loss of job, divorce, illness or excessive debt burden relative to income, not just the impact of rate resets, thus eliminating any possible benefit of a rate freeze.

What jumps out at me:

1. For the purpose of this study, servicers identified "investor-owned" loans as those with a billing address different from the property address. This is a much better measure than the occupancy code the databases carry, since it is based on the declarations made by the borrower at loan closing, and we know how reliable some of those were. There would be no distinction here between a property that was never occupied by the owner and one that was occupied originally but subsequently rented.

2. The vast number of forbearances relative to modifications should give us all pause. As its name implies, forbearance is the servicer's agreement to forbear from foreclosing for a temporary, stipulated period of time, during which the borrower agrees to resume making contractual payments and make up the delinquent payments, generally in an extra monthly installment. While it is possible that a modified loan was not delinquent prior to the modification, all forbearances by definition were previously delinquent. Forbearances are faster and cheaper than modifications; servicing agreements generally give the servicer wide latitude to enter into forbearances. It is quite possible (although this issue is not addressed in the MBA report) that many forbearances are the initial stage of a modification deal: the borrower is in essence put on a "probationary" plan to catch up on payments at a temporarily reduced level, and given a permanent modification only if the borrower performs at the forbearance terms. The precise situation in which a forbearance makes sense--a borrower who occupies and is committed to homeownership and who is experiencing some temporary inability to make payments--is the precise situation in which the "Hope Now" plan makes most sense. It therefore troubles me to see no discussion of whether forbearances are being used as an initial stage of the modification process, or as a cheap, not-well-thought-out substitute that is setting repayment installments too high for borrowers to reach.

3. The data on borrowers not located or not responding merely raises the question of why that is the case. We really need to know more about this borrower group: some will be "demoralized" borrowers who simply cannot cope adequately with their distress; some will be speculators not caught with the billing address check; some will no doubt have been straw borrowers. Some will be ruthless senders of "jingle mail." But without further information, we're not able to say from this data what the best response is to this group.