(Updates with more detail and numbers)
By Jessica Holzer
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- Stepped-up efforts by mortgage servicers to help borrowers stay in their homes failed to stem mounting foreclosures during the third quarter, as the economy worsened and more people struggled to keep up with loan payments.
State moratoriums on foreclosures and increased actions by servicers to lower interest rates, extend loan terms or otherwise modify troubled mortgages helped push down newly started foreclosures by 2.6% to 281,298 from the end of June 2008 to the end of September.
Still, foreclosures completed during the quarter rose nearly 8% to 127,738, while the number of foreclosures under way rose 11% to 617,642 during the third quarter, according to a report released by the Office of the Comptroller of the Currency and the Office of Thrift Supervision Monday.
The rise in foreclosures came as more borrowers fell behind on their payments, including many people who had already benefitted from loan modifications.
More than half of loans modified during the first quarter of 2008 had slipped back into delinquency after six months, and were 30 or more days past due by the end of September. Nearly one in five loans modified during the first quarter were 60 or more days past due after three months, and 37% were at least 60 days delinquent after six months.
Members of a coalition of mortgage servicers and investors aiming to reduce foreclosures said the high re-default rate on modified loans showed the limits of foreclosure prevention in a sharply deterioriating economy.
“Mortgage modifications work for people with incomes; it doesn’t work for people without income,” said Steve Bartlett, president and CEO of the Financial Services Roundtable, a member of the coalition, called Hope Now.
The report reflects data collected from nine national banks and five thrifts that had combined servicing portfolios of $6.1 trillion of mortgage loans at the end of September, representing more than 60% of all U.S. mortgages outstanding.
The report found that credit quality had deteriorated across all loan categories, from prime to Alt-A to sub-prime, during the third quarter, with the share of current and performing loans falling to 91.47% at the end of the third quarter from 93.33% at the end of the first quarter.
Most of the reduction in foreclosure starts during the quarter was due to state laws, particularly in California, that delayed foreclosures, argued Thomas Lawler, a housing economist in Leesburg, Va.
Still, mortgage servicers increased efforts to modify loans or initiated new payment plans, the report showed. The share of such loan workouts relative to homes lost through foreclosure, short sales or other actions inched up to 202.9% by the end of September, from 199.16% at the end of June.
There was a higher success rate for modifications of loans still held on lenders’ books, as opposed to those sold to third party investors, the report found.
Those loans re-defaulted at a 50.86% rate after six months, compared with a 60.76% rate for modified loans held by private investors. Modifications of loans sold to Fannie Mae (FNM) and Freddie Mac (FRE) were slightly less sustainable, with re-default rates of 57.11% and 57.87%, respectively.
Hope Now on Monday said it expected to have helped roughly 2.2 million people avoid foreclosure by the end of 2008. The coalition, which represents roughly three-quarters of the mortgage market through its 28 mortgage servicer members, also vowed to roughly double its 2008 loan modifications to 2 million next year.
However, it cautioned the number would depend on the job market and other economic conditions.
Bartlett said the industry would make more strides if the federal government agreed to share in the losses of any modified loans that re-default. Such a plan is being pushed by Federal Deposit Insurance Corp. Chairman Sheila Bair, and now by the industry, but has been opposed by the White House.
“If the federal government puts more money into mortgage modifications, we’ll have more mortgage modifications,” he said.
-Jessica Holzer, Dow Jones Newswires; 202-862-9228 ; jessica.holzer@ dowjones.com
(END) Dow Jones Newswires 12-22-081503ET Copyright (c) 2008 Dow Jones & Company, Inc.
