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Servicing

Modified seriously delinquent loans hold strong during mortgage crisis

Large volume of unmodified loans in pipeline challenges process

life rafts

At least 31% of loans that were seriously delinquent during the mortgage crisis were modified and performed better when compared to unmodified seriously delinquent loans, according to new data from Moody's Investors Service.

Not surprisingly, seriously delinquent loans in 2008 that servicers subsequently modified performed much better than did loans that were not modified given that servicers are going to try to keep the loan current for as long as possible, explained Hope Now executive director Eric Selk.

"From a servicer's standpoint, there’s a lot of upswing solutions that are being required by various investors, so early intervention is being required by everyone now," Selk explained.

As of June, approximately 1.1 million loans were 60-plus days delinquent and in foreclosure as of December 2008.

The large volume of seriously delinquent loans that were already in some stage of foreclosure during the mortgage crisis contributed to a high percentage of unmodified loans, as it is difficult for servicers to stop a foreclosure process once started —especially when the loan is in the latter stages of the legal process, according to Moody’s.

"Predictably, servicers focused on the low hanging fruit and, as a result, modified the many more loans that had fewer operational challenges and legal hurdles than those already in foreclosure had," explained Moody’s vice president William Fricke and senior vice president Joseph Snailer.

To put it into perspective, 45% of the 69% of seriously delinquent loans that were not modified were already in foreclosure in 2008, Moody’s said.

It’s important to note though that foreclosure process timelines continued to lengthen for all servicers and product types.

The primary driver of the clog in the pipeline is judicial state backlog, especially in Florida, New Jersey, Ohio and Pennsylvania.

"These timelines will likely continue to worsen because a high number of complicated, arduous or unworkable cases remain in the backlogs," Moody’s analysts stated.

Meanwhile, real estate-owned property sale timelines changed little for jumbo loans as well as Alt-A loans.

The strengthening housing market — especially in California and Florida — as well as servicers remaining focused on short sales is contributing to lower REO inventory, Moody’s noted.

Overall, modifications are continuously evolving and, as a result, practices and regulations put in place in 2008 are drastically different from 2011, Selk concluded.

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