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Why Do Mortgage Companies Do Better Modifying the Loans in Their Own Portfolios?

There are two offices in Washington that work together to put out a comprehensive report on mortgages in the United States. These are the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

Their report is the Mortgage Metrics Report. In this report they track closely the number of loans where people are facing foreclosure and who are offered loan modifications and how successful these modifications are.

They look at the mortgages of nine national mortgage companies and three large thrifts. These twelve are responsible for 64% of the mortgages in the United States.

Their report is a quarterly report. Because the volume of loans is so great their report normally is finalized and released three months after the end of a quarter. Their most recent report was released in September of 2009 and covered the second quarter of 2009 which ended June 30, 2009.

There are numerous charts in this report. One interesting chart in the report for the second quarter of 2009 focuses on the percentage of people who default again on their loans after a loan modification was made. These are people who had their loans modified and were facing foreclosure again because they did not continue to make their modified payments.

The chart monitors 5 investors – Fannie Mae, Freddie Mac, Government Loans, Private loans and Portfolio loans. The nine national mortgage companies and three large thrifts service loans for Fannie Mae, Freddie Mac, the government (FHA and VA) and Private investors. Portfolio loans are those that the mortgage companies and thrifts have put up the money for from their own funds. They keep these in their own portfolio rather than selling them to one of the other four investors.

Here are some interesting items from the chart:

· Anywhere from 27.7% to 34.4% of people whose loans were modified for the other investors had failed to continue to make their mortgage payments 3 months after the loans were modified. Only 14.0% of the people whose loans were in the portfolios of the mortgage companies and thrifts had failed to continue to make the payments after the loans were modified.

· 40.2% to 49.8% of the people whose loans had been sold to the other investors and whose loans were modified had failed to continue to make their payments on time after 6 months. Only 28.7% of the people whose loans were in the portfolios of the mortgage companies and thrifts had failed to continue to make the payments after the loans were modified.

· The percentage of people whose loans had been sold to other investors and who had failed to continue to make their payments after nine months was between 49.8% and 58.3%. Only 38.7% of the people whose loans were in the portfolios of the mortgage companies and thrifts had failed to continue to make the payments after the loans were modified.

· The percentage of people whose loans had been sold to other investors and who had failed to continue to make their payments after twelve months was between 52.4% and 59.1%. Only 42.4% of the people whose loans were in the portfolios of the mortgage companies and thrifts had failed to continue to make the payments after the loans were modified.

None of the loans being tracked in this chart are loans where modifications were made under the Making Home Affordable Modification Program.

For each investor the percentage of people who fall behind on their payments and face foreclosure again increases the further they are from the date their loans were modified. A closer look at this shows that the percentages are fairly close and consistent for each of the investors except the Portfolio investor.

The percentages of people who are facing foreclosure again in the Portfolio category after 3, 6, 9 and 12 months are significantly lower than the percentages for the others. In the Mortgage Metrics report it is suggested that this may be due to differences in modification programs and the investor’s flexibility to modify the terms of the loan.

There May Be a Totally Different Reason

Portfolio loans are those kept by the mortgage companies and Thrifts studied in this report. These are loans in which these companies and thrifts invested their own money. The other loans they have sold to Fannie Mae, Freddie Mac, the Government (FHA, VA, etc.) and Private Investors on Wall Street. While the monthly payments are made to the mortgage companies and thrifts, they just pass it on to the end investor.

These mortgage companies and thrifts lose more money on loans in their own Portfolio that end up in foreclosure than they do on the loans they have sold to everyone else. It looks like modifications they are making on the loans in their own portfolios are more favorable than the modifications they are making on the loans of other investors.

Is There Anything in the Report to Support This?

There just happens to be another chart in the report which implies that the mortgage companies and thrifts are doing this. This chart shows the types of loan modifications that were done during the second quarter of 2009. Here is what that chart reflects:

· The mortgage companies and thrifts reduced the interest rate on the loans they modified in their own portfolios 84.1% of the time. This was higher than any other group. The interest rates were modified 77% of the government loans. Interest rates were reduced on 43.6% of the Fannie Mae loans modified, 51.3% of the Freddie Mac loans modified and 63.6%of the private investor loans modified.

· The mortgage companies and thrifts extended the durations of the loan to recover any reductions in payment on 72.4% of their own loans. They extended the term on 77.6% of the Freddie Mac loans. The percentages of the rest were lower – 47.8% of the Fannie Mae Loans, 46.4% of the Government loans and 13.1% of the Private Investor loans.

· The mortgage companies and thrifts reduced the principal balances on 30.5% of the loans they modified in their own portfolios. They did not reduce the principal balances on any loans for other investors.

· The mortgage companies and thrifts deferred a portion of the principal due on 4.7% of the loans they modified in their own portfolios. They only did this 0.1% of the Fannie Mae loans. There were no principal deferments on any loans for any of the other investors.

· The mortgage companies and thrifts only froze the existing interest rates on 5.5% of the loans they modified in their own portfolios. The percentages on loans where they froze the interest rates on loans for the other investors ranged from 5.9% to 16.6%.

Let’s define these terms.

· Rate Reduction – The interest rate on the loan is reduced.

· Rate Freeze – The interest rate on the loan is frozen at the level it was at.

· Term Extension – The length of the loan was extended to recover any reductions in payment.

· Principal Reduction – The amount still owed on the loan was reduced.

· Principal Deferral – Some of the money owed was deferred to the end of the loan.

This chart clearly indicates that during the second quarter the mortgage companies and thrifts took action to give more favorable modifications on the loans in their portfolios than on the loans they sold to the others. This is clearly indicated by the fact that they reduced the interest rates on 84.1% and extended the terms on 72.4% of their loans. They also reduced the principal on 30.5% and deferred the principal on 4.7% of their loans.

The surprising thing here is the 30.5% principal reduction on the loans in their own portfolios. The mortgage industry has consistently fought against legislation proposed in congress to give judges the power to do this. Yet they are doing it on their own loans.

The mortgage industry has been lobbying that loan modifications don’t work. They regularly say that while modifications may temporarily postpone a foreclosure, the majority of people will fall behind on their payments and face foreclosure again. Yet these charts don’t show that. They show that almost 60% of the people facing foreclosure whose loans are in the portfolios of the mortgage companies and thrifts have been able to stay current on their modified mortgages twelve months after they have been modified.

It looks like more pressure needs to be placed on mortgage companies to modify all loans in the same manner as they are modifying those loans in their own portfolio.

 

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