A regulatory report on the pace of mortgage modifications was a decidedly mixed bag, showing that although servicers have increased the number of sustainable modifications, serious delinquencies among prime borrowers continue to rise.
The report, released Tuesday by the Office of the Comptroller of the Currency and Office of Thrift Supervision, said that servicers modified 185,156 loans in the first quarter, up 55% from the previous quarter and the highest level since regulators began recording the data a year earlier.
The number of modifications that reduced monthly payments also jumped. More than half of modifications in the first quarter lowered monthly principal and interest payments. Nearly a third of all modifications reduced monthly payments by 20% or more, up 19% from the previous quarter.
The report reiterated what had already become quite clear: modifications that reduce payments have lower delinquency rates. Six months after modification, only 24% of mortgages that had payments reduced by 20% or more were seriously delinquent, compared with 54% of mortgages where interest rates were left unchanged. Strangely, some servicers continue to make modifications that raise monthly payments, which accounted for 19% of all modifications. Half of such loans were delinquent within six months, while 56% were delinquent after a year.
In a conference call, regulators said the numbers reflect an increasing commitment on the part of servicers to make sustainable loan modifications.
"Servicers are implementing significantly more mortgage modifications than they have in the past," said Bruce Krueger, mortgage banking expert for large-bank supervision at the OCC. "They are reducing principal and interest."
But keeping mortgages current even after a modification remains a problem, the report said. Approximately 33% of loans modified in the first quarter of last year are now seriously delinquent, while nearly 10% of such loans are 30 days or more past due. An additional 13% are in the process of foreclosure. Overall, only 30% remain current.
Regulators were at a loss to explain why so many older modifications did not appear to have worked, but observers have said that many early modifications were not sustainable and did not reduce monthly payments.
Recently modified loans continue to perform better. Nearly half of the loans modified in the fourth quarter of last year are still current. Approximately 27% are seriously delinquent, while 14.3% are 30 days or more past due. Roughly 5.4% are in the process of foreclosure.
Some modifications made in the first quarter had already headed south by the end of the quarter, according to data in the report. Approximately 22% of loans modified in the first quarter were seriously delinquent by March 31, while roughly 10.3% were 30 days or more past due. Still, 64% of loans modified during that time remained current.
Regulators also noted several other bad signs, including continuing increases in the number of mortgages that are 60 days or more past due.
Prime mortgages, which represented two-thirds of all mortgages in the portfolio, had the highest percentage increase in serious delinquencies. The report said they increased 20% from the fourth quarter to reach 2.9% of all prime mortgages.
Regulators found that figure particularly troubling because they said there is less flexibility in modifying prime mortgages than subprime.
"There is more latitude in the subprime loan than for a prime loan in terms of rate reduction," said Fred Phillips-Patrick, director of credit risk for the OTS.
Krueger said regulators are focusing on the issue.
"As more prime borrowers start experiencing delinquencies on loans and don't have as much room for modification efforts it's an issue we are very aware of," he said. "It's troublesome."
Also a worry are foreclosures, which continue to increase despite the rise in modifications. After dipping briefly in the fourth quarter because of foreclosure moratoriums at several large banks, foreclosures in process jumped 22% in the first quarter, to 844,389 a 73% increase from the same point last year.
