Specific Findings:

1.       Nearly eight out of ten seriously delinquent homeowners are not on track for any loss mitigation outcome.  In our prior reports, seven out of ten homeowners were not on track for any loss mitigation outcome. This already disappointing ratio has become even worse, with 40,000 fewer loans in loss mitigation in May 2008 than in January 2008.

2.       New efforts to prevent foreclosures are on the decline, despite a temporary increase in loan modifications through the 2^nd Quarter of 2008. Unlike other data reports, we track both loan work-outs in process and those that have been finalized (closed). The number of homeowners working toward a loan modification has declined by 28% between January and May, falling to a level not seen since late in 2007. This decline stands in stark contrast to the 51% increase in loan modifications closed over this same period. This declining trend of new loans in process suggests that new loan modification approaches have been tailored to a limited group of homeowners. Instead of expanding loan modification options to reach a broader set of homeowners, more loss mitigation is being directed to selling homes short of foreclosure. In January, modifications in process outnumbered short sales in process by four to one; in May, that ratio had dropped to two to one.

3.     We estimate that one out of five loan modifications made in the past year are currently  delinquent.  The high number of previously-modified loans currently delinquent indicates that significant numbers of modifications offered to homeowners have not been sustainable. Recent reports identify that many loan modifications are not providing any monthly payment relief to struggling homeowners. While banks and Wall Street firms continue to report record write­downs of mortgage loan portfolios and securities, these losses do not appear to be flowing down to homeowners in the form of sustainable loan modifications. We are concerned that unrealistic or “band-aid” modifications have only exacerbated and prolonged the current foreclosure crisis.

4.     Three hundred thousand subprime loans are in the process of foreclosure as of the end of May 2008.  Thirty-eight percent (38%) of seriously delinquent subprime loans are in the process of foreclosure, with over 131,000 foreclosures completed on subprime loans in May 2008 alone. Delinquency and foreclosure rates remain high and have a ripple effect through housing, mortgage, and financial markets.

Given the inability of servicers and investors to adjust their approaches to meet this unprecedented challenge, the State Working Group continues to see a need for new and broader-based approaches to loss mitigation that are focused on homeowner sustainability. One such program is the FDIC’s new approach for addressing delinquencies in IndyMac’s servicing portfolio.¹ We hope other servicers will adopt similar proactive programs based on systematically revising loans to affordable levels.

The State Working Group hopes that recently-enacted federal legislation to provide a new federally-guaranteed refinance program (Hope for Homeowners) will increase the level of refinancing for poorly performing subprime loans; however, the ultimate impact of that program has not yet been seen. Recent federal government interventions in the mortgage and financial markets offer an opportunity to develop more options for homeowners and better systematic loan modification approaches. While the federal government struggles with the implications of the recent financial markets crisis, state and local governments continue to implement new and innovative approaches to slow the pace of foreclosures that are devastating their communities.

    1 In August, the FDIC began offering IndyMac borrowers with delinquent home loans the opportunity to have their loan modified to achieve an affordable and sustainable monthly payment. The program involves a variety of tools to achieve a mortgage payment for homeowners that does not exceed 38% of the homeowners’ monthly income. FDIC Implements Loan Modification Program for Distressed IndyMac Mortgage Loans, FDIC Press Release, (Aug. 20, 2008), available at: http://www.fdic.gov/news/news/press/2008/pr08067.html.

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