Prime, not subprime mortgages, had largest increase in delinquencies in late 2008

Homeowners with prime mortgages were delinquent at the end of 2008 at an increased rate twice as high as the rate just nine months earlier, according a recent federal report. Mortgage modifications, without lower payments, remained problematic.

by Broderick Perkins
© 2008 DeadlineNews.Com


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Deadline Newsroom - Homeowners with prime mortgages were delinquent at the end of 2008 at an increased rate twice as high as the rate just nine months earlier, according a recent federal report.

The jump was larger than subprime loans, according to the Office of the Comptroller of the Currency and Office of Thrift Supervision (OTS) said earlier this month.

At the end of the fourth quarter, 2.4 percent of prime mortgages were seriously delinquent, more than double the 1.1 percent recorded at the end of March 2008.

In a report that covers mortgages serviced by nine large banks and four thrifts -- two thirds of all outstanding mortgages in the nation -- just under 90 percent of mortgages were performing at the end of 2008, compared with 93 percent at the end of September 2008.

Subprime mortgages had the highest level of serious delinquencies, but the biggest percentage jump was in prime mortgages, the lowest risk category which accounts for nearly two-thirds of all mortgages serviced by the reporting institutions.

Fewer mortgage workouts, more problems

Loan modifications and payment plans increased by more than 11 percent in the fourth quarter 2008, but declined as a percentage of all new home retention actions, from 52 percent in the second quarter, to 43 percent in the third quarter and 40 percent in the fourth quarter.

Unfortunately, re-default rates on modified mortgages were both high and rising during the first three quarters of 2008, with loans modified in the third quarter showing the highest re-default rates.

The percentage of modified loans that were seriously delinquent (60 or more days past due) after eight months was 41 percent for loans modified in the first quarter and 46 percent for loans modified in the second quarter.

The Feds suggested continued poor underwriting, as well as the worsening economy and initially excessive borrower leverage were to blame.

The trend continued in the third quarter, the Feds said.

• (Get the full scoop on the Mortgage Modification Maze, right here, in the Deadline Newsroom.)

Workouts that resulted in unchanged mortgage payments or higher mortgage payments were also blamed. Overall for 2008, about 42 percent of modified loans resulted in reduced payments, 27 percent in unchanged payments, and 32 percent in increased payments.

The proportion that reduced payments increased significantly in the fourth quarter, to more than 50 percent of all modifications, as if in recognition that the higher and unchanged modifications weren't working.

"This new data shows that, in the current stressful environment, modification strategies that result in unchanged or increased mortgage payments, run the risk of unacceptably high re-default rates," said Comptroller of the Currency John C. Dugan.

Conversely modifications that reduced monthly payments significantly had much lower re-default rates.

Lenders have been reluctant to reduce a mortgage's principal, but that's a solid approach to getting lower monthly payments, when lower interest rates don't fully do the job.

The Obama Administration's "Making Home Affordable," is promoting lowering monthly payments.

OTS Acting Director John E. Bowman said, "The trend toward lowering payments to make home mortgages more affordable is moving in the right direction."

© 2008 DeadlineNews.Com

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Broderick Perkins, an award-winning consumer journalist, parlayed 30 years of old-school journalism into a digital real estate news service, the San Jose, CA-based DeadlineNews Group, including DeadlineNews.Com, a real estate news and consulting service and Web site, and the Deadline Newsroom, DeadlineNews.Com's news back shop. Perkins is also a National Real Estate Examiner. All the news that really hits home from three locations -- that's location, location, location!

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