State Looks to Improve Workout Success
By Robert Brannum
The New York State Banking Department is leading an effort to improve the rate at which defaulting home loans are successfully modified. The department, led by Banking Superintendent Richard Neiman, pushed for a set of recently approved laws which require mortgage servicing companies to be considerably more responsive – and forgiving – when working with borrowers with troubled loans.
These new state laws, which went into effect on October 1, require mortgage servicers to respond to a borrower’s request to pursue a modification within strict timelines. Once a homeowner submits a modification application, the servicer must acknowledge receipt of the application and inform the applicant whether additional information is required within 10 days of receiving the application. Within 30 days of receiving the modification application, the mortgage servicer must provide, in writing, its decision of whether or not a modification has been granted.
These new regulations are part of a larger effort by the Banking Department to encourage – and in some cases, require – loan servicers to improve modification successes. The superintendent has taken an assertive position in his department’s role to enforce these new legal requirements. In an industry article, Neiman promised to take a proactive approach in seeking violators, saying the department “will be looking for that case in the event of any wrongdoing, because we know the message it will send to the entire industry. These are not guidelines, these are not voluntary programs, these are laws and regulations that are now enforceable by our department, by the state attorney general, and by federal supervisory agencies.”
HAMP Efforts Falling Short
The Banking Department’s effort to strengthen legislation around the mortgage servicers’ responsiveness stems in part from the superintendent’s frustration with the federal governments’ Home Affordable Modification Program (HAMP). Earlier this summer, the U.S. Department of the Treasury issued a report that indicated that more than 90,000 modifications that were in a trial stage were later cancelled before reaching permanent status. Neiman fears that many of these, and other cancellations, are due to substandard processes in place at many loan servicers. In a Banking Department press release Neiman said, “The ever-increasing number of homeowners being pushed out of HAMP does, and should, raise serious questions about whether these cancellations are being properly processed by servicers. With servicers now required to gather all documentation upfront, before any mortgage modifications can be made, these types of mistakes now threaten to keep deserving homeowners, that might otherwise qualify, out of the program.”
In another indictment of many servicers’ ineffective internal monitoring processes, the State Foreclosure Prevention Working Group, an organization comprised of the attorneys general of 12 states, three state bank regulators and the Conference of State Bank Supervisors, released a study in August indicating that 60 percent of borrowers with mortgages that are 60 days or more delinquent are not being forwarded to their mortgage servicers’ loss mitigation departments. Many mortgage servicers – seemingly in a key position to observe loans slipping into trouble – are not proactively moving those loans into the mitigation process. As a result, foreclosures are still outpacing modifications. A statement released by the Working Group gives warning about an additional wave of foreclosures: “Without improvements to foreclosure prevention efforts, the group anticipates that hundreds of thousands of these seriously delinquent homeowners could end in foreclosure.”
New York’s new laws are intended to address this primary concern: that mortgage servicers improve their internal administrations in order to process modifications more efficiently. “We would like for the regulation of mortgage servicers in New York State to serve, not only as a model for other states, but also as a model for national minimum standards that can be enforced across the country,” said Neiman.
Principle Reduction a Key to Successful Modifications
One of the key reasons that HAMP-based modifications are failing to advance from trial to permanent modifications, according to Neiman, is because many do not include any principal reduction elements – servicers are extending terms or adjusting interest rates, but relatively few have included any principal forgiveness. According to the U.S. Department of Housing and Urban Development’s July report, of 1.052 million recent trial modifications, 617,000 modifications were cancelled, leaving only 40 percent to become permanent modifications. Quinn Eddins, the director of research for Radar Logic, a real estate market research firm, commented in HousingWire about HAMP’s failings, saying that “HAMP entails extending the period over which mortgages can be paid, which is all fine and good, but if the homeowner continues to be deeply underwater, there’s always going to be the incentive to stop paying the mortgage or redefault. A new way of modifying mortgages should be explored.”
Among those new ways, according to New York state’s banking department, includes a greater willingness to reduce principal outstanding on troubled loans.
The State Foreclosure Prevention Working Group reported in late August that recent loan modifications are, in fact, starting to perform better than those made earlier in the housing crisis, as measured by falling redefault rates – redefaults are defined as loans that become seriously delinquent within six months
of modification. According to data analysis performed by the Working Group, loan modifications completed in 2009 have been 40 to 50 percent less likely to redefault compared to 2008 modified loans. A
recent study from the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) reported similar findings.
Supporting the Banking Department’s findings, the OTS and OCC reported a 40 percent drop in re-defaulted loans among loans modified in the third-quarter 2008 and those modified in the third-quarter 2009. The redefault rate drops even further when loans underwent a principle reduction of 10 percent or more: redefaults among loans with principle reductions made in August and September 2008 to the same period in 2009 fell from 35.4 percent to just 12.9 percent.
Neiman commented on these results, saying that “the data shows that modifications that include a principal reduction perform significantly better than others. We expect banks to take the performance of these modifications into account when deciding the best options for both consumers and investors.”
Robert Brannum is a freelance writer based in Boston with special expertise in the finance industry.