About 95% of rate reduction modifications are still facing resets – with many of those resets starting this fall, according to Black Knight Financial Services' Mortgage Monitor report for February. As such, many in the industry will be watching the modification re-default rate closely over the remainder of this year.
As Herb Blecher, senior vice president of Black Knight's Data and Analytics division, points out, loan modifications have been on the decline for more than a year now; however, the number of modifications through the Federal Housing Administration's (FHA) Home Affordable Modification Program (HAMP) actually increased during the first several months of this year, due mainly to changes that the FHA made to the program to increase borrower eligibility.
At the same time, stricter underwriting guidelines for those loan modifications have resulted in a decrease in the re-default rate.
Blecher says that because the upcoming resets are "controlled resets, we do not expect drastic changes in monthly mortgage payments at first, but will monitor these loans closely to assess the level of risk."
However, he points out that mortgage modification re-default rates are currently about 30% higher among borrowers who are underwater compared to borrowers with positive equity, meaning that – come fall – if a high number of borrowers facing resets are underwater, that could lead to a boost in the re-default rate.
Meanwhile, the report shows that residential real estate sales were essentially flat in February, on a year-over-year basis; however, non-distressed sales were up almost 15%.
‘February's data showed the continued trend of declining origination activity we've been observing since mid-2013, with monthly originations falling to their lowest recorded point since at least 2000,’ Blecher says.
Although credit standards did show some signs of loosening in March, there was very little origination activity among borrowers with lower credit scores.
‘Credit standards have shown little sign of easing – only about 30 percent of 2013 loans went to borrowers with credit scores below 720 – which indicates that significant opportunity to expand mortgage origination activity is available, if risk appetites allow,’ Blecher says.
Black Knight's report also reveals that the Consumer Financial Protection Bureau's new rules that went into effect in January have resulted in a sharp shift in the timing of foreclosure starts. As the CFPB rules dictate, foreclosure cannot begin until after 120 days of delinquency – and the data shows that foreclosure starts at the 90-day mark have all but ceased, while four-month delinquency starts have climbed more than 100% since December.
At the same time, foreclosure sales hit the lowest levels since 2007. With fewer loans in the foreclosure process, these numbers will continue to decline, but the result has been an increase in pipeline ratios (the time necessary to clear through the backlog of loans either seriously delinquent or in foreclosure at the current rate of foreclosure sales). This has been most pronounced in non-judicial states, where legislative actions have contributed to the slowdown more significantly over the last several months.
The report finds that the total U.S. loan delinquency rate dropped 4.87% in February, compared to January, to reach 5.97% of all loans.
The total U.S. foreclosure pre-sale inventory rate in February stood at 2.22%, a drop of 5.29% compared to January.
States with highest percentage of non-current loans included Mississippi, New Jersey, Florida, New York and Louisiana.
States with the lowest percentage of non-current loans included Colorado, Montana, Arkansas, South Dakota and North Dakota.
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