The latest Federal Housing Finance Agency (FHFA) report on foreclosure prevention and refinance activity contained some hopeful signs, but financially troubled homeowners are still far more likely to lose their homes than they are to get sustainable modifications and affordable mortgage payments.
The FHFA report covers outcomes from two major federal programs put in place to help American homeowners: the Home Affordable Modification Program (HAMP), which is meant to help eligible borrowers in danger of foreclosure get a home loan modification, and the Home Affordable Refinance Program (HARP), which is intended to help eligible underwater borrowers refinance to a lower mortgage rates.
Here are some of the positive signs from the report, covering the third quarter of 2010:
- Home loans modified in the last three quarters are performing substantially better three months after modification compared to loans modified in earlier periods. Less than 10 percent of loans modified in the last three quarters were 60-plus days delinquent three months after modification.
What might explain this higher success rate? Mortgage servicers are offering more modifications that lower payments--even offering principal reductions in some cases--whereas in the past they were likely to merely add arrearages to the mortgage balance. (In fact, 81 percent of mortgages modified in the first quarter of 2008 actually resulted in payment increases, while in third quarter of 2010, only 8 percent did.) The FHFA concludes that "the performance of modified loans is driven by size of payment reduction in the borrowers' monthly payments."
- More than half of loan modifications in this period lowered monthly payments by over 30 percent. Not only are more homeowners seeing payment reductions, the magnitude of those payment reductions offered by mortgage servicers means that loan modifications are now more likely to be affordable and sustainable.
- Loans 60-plus days delinquent declined for the third consecutive quarter. The number of loan 60-plus days delinquent across the board decreased by 109,700 loans, or 6.8 percent, during the third quarter to approximately 1.5 million. This is likely due to the fact that many loans were modified, stopping the clock on their delinquency.
- Nearly 35,400 HAMP trial modifications transitioned to permanent during the third quarter, bringing the total number (through December 2010) of active HAMP permanent modifications to nearly 522,000.
- Refinances completed under HARP increased by 26 percent from the previous quarter. More underwater homeowners were able to take advantage of low mortgage rates to refinance, making their mortgage more affordable and less likely to end up in default. The number of HARP refinances since the program's inception total nearly 479,900, closing in on the number of permanent loan modifications completed under HAMP to date.
However, the FHFA report contained discouraging data as well, indicating that wide-scale support for struggling homeowners or a full housing market recovery are far from assured.
- The number of loan modifications actually declined 14 percent to 146,500 during the third quarter, and the majority of loan modifications completed were through non-HAMP programs, according to the report. Independent of the FHFA report, some mortgage analysts have concluded that the failure rate of non-HAMP modifications is significantly higher than that of HAMP loan mods, and that the terms of loan modifications outside of the government program are not nearly as generous or sustainable. So the fact that non-HAMP modifications continue to dominate is not a positive sign for homeowners.
- Thirty-day delinquent loans increased by 17,600 loans, or 2.7 percent, during the third quarter to approximately 682,000. This is an indication that more borrowers are showing signs of trouble.
- Foreclosure starts increased 23 percent in the third quarter, including nearly 339,000 completed third-party foreclosure starts and 138,100 foreclosure sales.
Industry foreclosure data: Foreclosure still the likeliest outcome for many
While a total of 642,668 HAMP loan modifications have been completed, this is dwarfed by the number of foreclosures, which stood at 1.46 million in the first three quarters of 2010 alone, 1.68 million in 2009, and 1.25 million in 2008, according to a report from the trade publication DS News. Given these numbers, it's still much more likely that a financially distressed homeowner will end up in foreclosure than with a modified home loan.