Mortgage Quality Continues to Improve Despite Rise in Early Defaults: OCC

WASHINGTON — Mortgage portfolios of the country's largest lenders showed more signs of improvement during the second quarter despite an uptick in early delinquencies, according to a report issued Thursday by the Office of the Comptroller of the Currency.

The agency's quarterly mortgage metrics report showed that 90.6% of the 26.5 million loans reviewed were performing well in the second quarter, up from 90.2% in the previous quarter and 88.7% a year earlier. The number of foreclosures and "seriously delinquent" loans also dropped to their lowest levels since the crisis hit in 2008. The OCC attributed such improvements to a strengthening economy, servicing transfers, home retention efforts and home forfeiture actions.

"The portfolio performance reported in the mortgage metrics are getting stronger," said Kathie Gouldie, the OCC's lead retail credit expert, in a conference call with reporters. "These are really positive trends and we hope that they will continue."

However, the OCC also noted a slight increase in loans that were less than 60 days past due after two previous quarters of declines. The percentage of early past-due loans rose 11.6% from the first quarter and 1.8% from a year earlier, equaling roughly 2.9% of the mortgage portfolio. Gouldie said this was partly seasonal, but she added that some outliers have to be taken into consideration.

"There's a little bit of data noise from loan transfers that are complicating our normal view into this phenomenon," she said. "We actually have a smaller denominator at this point, so the number of early delinquency loans is really relatively stable. But it's because of the smaller denominator that it makes the increase look larger."

Regulators were also puzzled by a drop in the quality of loans guaranteed by the government, which made up nearly 25% of the total serviced portfolio. The report showed that the percentage of performing government-guaranteed mortgages fell to 85.7% from 86.2% the previous quarter after it had improved from the 84.9% reported a year earlier. The percentage of seriously delinquent government-guaranteed mortgages also increased half a percent from the previous quarter. Though there may be some seasonality to rising issues with government-backed loans, Gouldie mostly chalked it up to the different nature of such loans compared to those held by larger banks.

"Government-guaranteed loans have a different credit quality about them … it's a different mix of folks that are going through mortgages in a government guaranteed space," she said. "We picked up that there's seasonality, generally, in early delinquency and it's probably transferred over into these portfolios but it's not something that I think we can conclusively say happens in the government-guaranteed" space.

Overall, older past due loans continued to improve with a 15% drop from last year in the percentage of mortgages that were more than 60 days past due or the borrower was in bankruptcy. The number of loans in foreclosure also dropped nearly 40% to 744,369 and new foreclosures dropped 50% to 150,592 compared with a year ago.

"I think it's also worth calling out that home retention actions — keeping people in their home, doing something to help them make affordable payments — that activity and those actions are more than double the home forfeiture volumes," Gouldie said. "And that doesn't even include what we don't capture in the mortgage metrics report" — namely, refinanced loans.

Actions that lenders took to keep borrowers in their home, such as modifications and payments plans, dropped nearly 10% from the previous quarter and 25% from a year earlier, to 314,672 in the second quarter. The decline follows similar trends seen each quarter since last year. Gouldie said she was encouraged by the decline in home retention programs because it meant borrowers were being approved for more typical programs like a refinanced mortgage.

"There's been an uptick in equity, there's been an uptick in some markets out there that are coming back and more people are a little bit more stable in what they can afford in terms of a normal mortgage payment as opposed to this back-end or a near-default scenario," she said. "Those that are able and are in better shape are not being captured here because they're going through a normal refinance."

Since early 2008, servicers have modified nearly 3.2 million mortgages through the first quarter of 2013. Less than half of those modifications, or 46.6%, were current or paid off by the second quarter of this year. The remaining modifications were "seriously delinquent" (11.5%), completed through foreclosure (7.5%), less than 60 days delinquent (6.8%), or in the process of foreclosure (6.1%).

Of all the modification plans, the OCC said the Home Affordable Modification Program continues to outperform others with 58.3% of those implemented since late 2009 having been current or paid off by the second quarter this year.

"HAMP modifications perform better because of the emphasis on reduced monthly payments, affordability relative to income, income verification, and successful completion of a trial period," the OCC said. "While HAMP modifications generally reduce the borrowers' monthly payment more and perform better over time, more restrictive criteria limit the number of borrowers who qualify for HAMP modifications."

The OCC second-quarter mortgage metrics looked at 26.5 million loans totaling $4.5 trillion in principal balances, which represent 52% of all the outstanding mortgages in the country.