The credit performance on Countrywide loans serviced by Bank of America (BAC) is improving at a rate faster than loans serviced by other large mortgage servicers — without a significant use of loan modifications.
The Countrywide loans serviced by BofA represent 15% of all outstanding nonagency loans. Combined with the other loans it services, BofA is the largest servicer in the asset class, according to Barclays Capital. More than half of these BofA-serviced nonagency loans are in Countrywide trusts. BofA acquired Countrywide in 2008.
Barclays Capital found that always current-to-delinquent roll rates on Countrywide subprime loans were cut by half to 1.1% in June from 2.2% in June 2010. The rate of improvement is better than loans serviced by Wells Fargo (WFC), JPMorgan Chase (JPM), Citigroup (C), or GMAC.
Countrywide’s dirty current-to-delinquent roll rates also fell substantially to 4.9% from 9.3% in the same period, a rate of improvement in line with that of JPMorgan and exceeding that of the other three large bank servicers over that time frame.
However, modification rates on Countrywide loans are dropping. The rate at which BofA modifies those loans is lower than that of other large bank servicers and well below the level of independent servicers. See chart below for a graphical comparison.
Barclays estimates that over the past several months BofA modified 0.1% to 0.2% of Countrywide’s nonagency subprime loans each month, much less than the 0.6% to 1.2% for JPMorgan-serviced loans.
“Similarly, we believe that only 19% of Countrywide nonagency subprime loans still outstanding have ever been modified versus 41% for JPMorgan, 37% for Wells Fargo, and 34% for Citigroup,” Barclays said in a recent report.
Yet while modification rates on Countrywide loans are generally low, BofA’s usage of debt forgiveness modifications is increasing dramatically.
“We attribute this to the servicer settlement that was finalized in March 12 that required these servicers to meet certain principal reduction modification targets,” Barclays said in the report.
Principal reduction modifications represent less than 30% of total modifications on BofA’s nonagency subprime book in 2010 and 2011, but debt forgiveness modifications have represented 40% to 60% of its total modification activity since May 12, Barclays said. Other large servicers such as JPMorgan and Wells Fargo have also experienced increases in their usage of principal reduction modifications.
Given that each of these banks receives increased incentives for performing debt forgiveness modifications during the first year after the settlement, Barclays expects the usage of principal reduction modifications to remain elevated over the next several months.