While loan modifications continue to ease distress for a small fraction of delinquent loans in Ohio, the refinancing of current underwater loans is also decreasing the state's inventory of troubled mortgages.

Furthermore, the increased rate at which distressed loans are recovering without a modification suggests that improving economic factors are having a positive effect on the housing recovery, said Research Economist Francisca Ritcher and Senior Policy Analyst Lisa Nelson with the Federal Reserve Bank of Cleveland.

The researchers said the share of loans entering delinquency continued to decline, an ongoing trend for the past three years. Additionally, exits out of delinquency such as short sales and changes to real estate-owned status outpaced entries into delinquency for most of 2012.

"However, the movement along the delinquency–foreclosure–liquidation path continues to be sluggish: Almost half of the loans entering delinquency in the first two quarters of 2011 are still either 60 or more days delinquent or in foreclosure one year later," the researchers said.

The self-cure rate, which reflects the ability of borrowers to recover from delinquency without a modification, has increased since 2009.

About one-third, or 34%, of loans that entered delinquency in the first four months of 2011 were current six months later without a modification.

Click on the graph to view status of delinquent loans in Ohio at six months. 

In a previous analysis, the researchers found that loan modifications represented a path out of distress for a very small fraction of delinquent loans. 

Of all loans entering delinquency in the first of 2011, 7% were successfully modified, meaning they remained current six months after modifications. 

"Furthermore, we do not find indications that the short sale of delinquent loans is emerging as a meaningful alternative loss-mitigation tool," the researchers stated.

For the last two years, the average share of loans estimated to be underwater is above 20%. However, there have been variations across Ohio counties, with higher rates in the northeast region, according to Nelson and Richter.

Nonetheless, nearly 26% of loans paid off in 2012 were underwater and current, up 11% from 2008.

"This suggests that refinances or sales of potentially distressed loans are picking up, and are likely contributing to lowering the inventory of delinquent loans in the state," the researchers said.

Click on the graph to view percent of payoffs of delinquent/underwater loans in Ohio.