Another day, another report that mortgage delinquencies are continuing to rise and this time the increase is most notable among prime borrowers. However, on the brigt side, home retention efforts are now outstripping both new delinquencies and new foreclosures.  

The Office of Comptroller of the Currency and the Office of Thrift Supervision released their joint Mortgage Metrics Report for the fourth quarter of 2009 last Thursday.  The report covers more than 64 percent of all mortgages outstanding in the United States; nearly 34 million loans totaling almost $6 trillion in principal balances.  Most of the major loan servicers provide data for the report which covers information on loan performance for all types of first-lien mortgages.

Overall mortgage performance declined 0.9 percent during the fourth quarter.  This was the seventh straight drop and current and performing mortgages now represent only 86.4 percent of the total portfolio. 

7.1 percent of all loans are seriously delinquent, i.e. over 30 days past due, and those 90 or more days in arrears increased by 21.1 percent since the third quarter and now represent 4.7 percent of all mortgages in the portfolio.

Seriously delinquent prime loans increased by 16.5 percent and among early stage delinquencies - those 30 to 59 days past due - a group that remained relatively stable overall, the percentage of prime mortgages increased from 1.8 to 1.9 percent.  The report noted that the continued decline in the performance of prime mortgages reflect the increasing impact of economic conditions on those borrowers and is significant because those mortgages account for 68 percent of the entire portfolio.

As has been noted in other recent reports on foreclosure patterns, the increase in seriously delinquent mortgages is attributable in part to mortgages being held in delinquent status for longer periods before proceeding to foreclosure.  This is a result of recent state laws requiring various types of notice to borrowers and opportunities for them to cure defaults as well as various state, federal, and proprietary foreclosure prevention programs.  For the same reasons newly initiated foreclosures declined while the number of foreclosures in process remained stable.

Servicers participating in the Treasury Department's Home Affordable Mortgage Program (HAMP) enrolled 259,500 borrowers in trial modifications during the quarter and converted over 21,000 trials into permanent modifications.  Other loss mitigation programs resulted in 102,102 loan modifications and 116,600 payment plans during the quarter.  Overall, servicers implemented more than 594,000 new home retention actions in the fourth quarter.  This exceeded the 261,346 increase in delinquent mortgages and was double the number of loans entering foreclosure.  The number of new home retention actions implemented during the fourth quarter was also double the number initiated in the same quarter of 2008 but was a 12.4 percent decrease from the third quarter of 2009.  Both numbers are attributable to the implementation of HAMP which created a surge of activity in the second and third quarters.  For a number of reasons, however, new HAMP interventions are now proceeding more slowly.

More than 82 percent of loan modifications reduced monthly mortgage payments including 100 percent of HAMP modifications.  Principal deferral was included in 6 percent and principal reduction in 7 percent.  Principal reductions were confined almost entirely to loans held in the servicers' own portfolios.

Modifications made in the second and third quarters of 2009 performed better at 3 months and 6 months than older modifications.  This corresponded to the number of modifications that reduced monthly payments which also performed better than those that left payments unchanged.  Still the failure rate remained high with more than half of all modifications falling 60 days or more delinquent within 9 months of modification.  Modifications to loans held in the servicers' own portfolios also performed better on average, possibly due to greater lender flexibility.  Modified government-guaranteed mortgages performed the worst in terms of defaults at the 6, 9, and 12 month post-modification marks.

Servicers reported that HAMP and other foreclosure mitigation efforts will help a significant number, but by no means all, distressed borrowers. They expect new foreclosures to increase in the future as borrowers and lenders exhaust other alternatives.

Servicers have been encouraged to work with borrowers with subordinate liens.  Lack of information has constrained many efforts to restructure loans where junior liens are involved but various initiatives are underway to increase communication between lenders.  These second liens present additional risk and OCC and OTC have instructed banks and thrifts that hold them to increase loan loss reserves accordingly.