Prime and Subprime Residential Mortgages 2007 Loss Mitigation by klr82781

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									    Prime and Subprime
   Residential Mortgages

2007 Loss Mitigation Activity

              By

HOPE NOW Alliance Servicers




                                  Bill Longbrake
          Anthony T. Cluff Senior Policy Advisor
                 Financial Services Roundtable
                                  February 2008
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EXECUTIVE SUMMARY
An estimated 869,000 mortgage holders were helped in the second half of 2007
through either a formal repayment plan (652,000) or a loan modification
(217,000). During the same period 283,000 foreclosure sales were completed.
Based on 1,446,000 average monthly delinquencies of 60 days or more past due
during the second half of 2007, 45.3% received a formal repayment plan, 14.8%
received a modification and 19.7% resulted in a completed foreclosure sale.

Fourteen HOPE NOW servicers responsible for more than 33.3 millions home
loans or about 62% of both prime and subprime loans outstanding nationwide, as
of September 2007, provided the data.

The data for the second half of 2007 reveals 324,000 prime borrowers and
545,000 subprime borrowers were helped.
      • 20.7% of prime borrowers helped received a modification
      • 27.5% of subprime borrowers helped received a modification
      • 34.8% of subprime borrowers helped during the fourth quarter received
          a modification, indicating a rapid increase in the use of modifications
          as a loss mitigation solution

In addition, the study also collected information on foreclosure activity and
trends. Even though there appears to be a large number of foreclosures initiated
by servicers, only one-third of foreclosures initiated actually result in a completed
sale. Frequently borrowers do not respond to their servicer’s attempts to contact
them until they receive their first legal action notice. HOPE NOW’s borrower
outreach initiatives are already increasing the number of borrowers who respond
before a foreclosure action is initiated.

In addition to aggregate nationwide data, the report includes quarterly data for
the 50 states and the District of Columbia.

INTRODUCTION
This study is an outgrowth of a broad-based alliance of government sponsored
enterprises, industry trade associations, counseling agencies and mortgage
servicers to respond to the unprecedented housing crisis facing the nation and
individual homeowners. The intent is to provide data systematically over time
about trends in mortgage delinquencies, outreach initiatives, loss mitigation
activity and other measures that describe what is happening to at-risk residential
mortgage borrowers. While this study focuses on aggregate national and state
loss mitigation activities, other data and studies are underway that will provide
further information about what mortgage servicers, counseling agencies and
government sponsored enterprises are doing to respond to the mortgage crisis.




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We wish to acknowledge the assistance of McDash Analytics in compiling the
data for this study.

HOPE NOW ALLIANCE
HOPE NOW is an alliance between counselors, mortgage market participants,
and mortgage servicers to create a unified, coordinated plan to reach and help as
many homeowners as possible. The members of this alliance recognize that by
working together, they will be more effective than by working independently. The
Department of the Treasury and the Department of Housing and Urban
Development encouraged these leaders to form this alliance, which includes,
American Bankers Association, American Financial Services Association,
American Securitization Forum, Assurant, Inc., Aurora Loan Services, Avelo
Mortgage, LLC., Bank of America, CCCS Atlanta, Inc., Carrington Mortgage
Services, Citigroup Inc., Consumer Bankers Association, Consumer Mortgage
Coalition, Countrywide Financial Corporation, EMC Mortgage, Inc., Fannie Mae,
The Financial Services Roundtable, First Horizon Home Loans and First
Tennessee Home Loans, Freddie Mac, GMAC ResCap, Home Loan Services,
Inc. (d/b/a First Franklin Loan Services & NationPoint Loan Services),
Homeownership Preservation Foundation, HomEq Servicing, Housing
Partnership Network, The Housing Policy Council, HSBC Finance, Indymac
Bank, JPMorgan Chase & Co, Litton Loan Servicing, MERS, Mortgage Bankers
Association, National City Mortgage Corporation, Nationstar Mortgage, LLC.,
NeighborWorks America, Ocwen Loan Servicing, Option One Mortgage
Corporation, PMI Mortgage Insurance Co., Saxon Mortgage Services, Securities
Industry and Financial Markets Association, Select Portfolio Servicing, Inc., State
Farm Insurance Companies, SunTrust Mortgage, Inc., Washington Mutual, Inc.,
Wells Fargo & Company, and Wilshire Credit Corporation.

DATA
Monthly aggregate data were provided by 18 servicers for part or all of 2007; 14
provided data for every month of 2007. The data included in this report are
limited to those 14 servicers who serviced 62.3% of all residential loans in the
U.S. Alliance members collectively service an even larger percentage of total
industry loans including an estimated 94% of subprime loans. During 2008 data
will be reported from additional servicers.

Data are reported for both prime and subprime loans. Prime loan data was
provided by 10 servicers and subprime data was provided by 10 servicers. Not
all companies service both prime and subprime loans.

No attempt was made to provide a specific definition of prime and subprime
loans. Rather, each servicer was requested to provide prime and subprime loan
data consistent with its internal segregation of servicing activity. Thus, while it is



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possible that each company defines prime and subprime loans differently, such
differences are comparable over the monthly 2007 reporting period.

The 14 companies whose data is included in this report serviced 33.3 million
loans, which accounted for approximately 62.3% of total residential mortgages
serviced in the U.S. as of September 2007. The mortgage industry serviced
approximately 53.4 million loans, based on estimates compiled by the Mortgage
Bankers Association of America (MBA), as of September 2007.

Industry Market Coverage (millions of residential mortgage loans)
                                                                                               Hope Now
                                             Hope Now            MBA                           Estimated
                                              Alliance       Delinquency        Extrapolated   Percent of
                                              Survey           Survey           MBA Survey      Industry
Total Loan Count as of September
2007                                                 33.3                45.4           53.4            62.3%
  Prime Loan Count                                   29.0                39.4           46.4            62.6%
  Subprime Loan Count                                 4.3                 6.0            7.1            60.9%

Industry market coverage statistics are based on MBA Delinquency Survey data
from September 2007, industry percentages are derived using Hope Now
Alliance data from September 2007 for a consistent basis. The MBA's survey
covers 85% of first residential liens; industry amounts are adjusted for this
accordingly.

Estimates of total industry loans for Q2 and particularly Q1 of 2007 are skewed
downward due net purchase of loans serviced as the year progressed rather than
to net origination and payoff activity. In other words, total industry loans during
Q1 and Q2 2007 were probably closer to 53 million than the numbers reported in
the table below.

Summary Loss Mitigation Statistics for 2007 - Industry Extrapolation (thousands of
residential loans)
Summary loss mitigation statistics aggregate the Hope Now Alliance data on a quarter over quarter basis
and are extrapolated to an industry estimated aggregate. Quarterly statistics presented below
represent monthly averages.
                                       Q1                   Q2                  Q3                 Q4
Number of Loans
Total                                    50,244              52,661                53,429           53,423
  Prime                                  43,062              45,286                46,305           46,509
  Subprime                                  7,182                7,375               7,124              6,914

There were 7.1 million subprime loans as of September 2007, constituting 13.3%
of total loans serviced.




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The survey covered the following data elements: number of loans, number of
loans 60 days or more past due, the number of foreclosures initiated (based on
the MBA definition of foreclosure starts), the number of foreclosure sales
completed, the number of repayment plans established, the number of loan
modifications completed, the number of formal repayment plans in inventory and
the number of real estate owned (REO) properties in inventory. REO inventory
data are still undergoing validation and reconciliation and thus are not included in
this report.

Industry extrapolations were estimated by dividing the amounts reported by
HOPE NOW servicers by the aggregate percentage of total industry loans these
companies service. To be conservative with creating industry estimates,
servicers with a particularly high level of loan modifications completed were
excluded in calculating the industry gross up but then were added to the gross up
to obtain an overall industry estimate. This means that the actual number of
modifications completed may be higher than those estimated in the report; they
are unlikely to be lower.

Aggregate state data are totals reported by HOPE NOW servicers and are not
extrapolated to an industry-wide level.

DELINQUENCIES
Delinquencies are collected based on the standard definition of 60 days or more
past due. Reflecting the evolving mortgage crisis, delinquencies rose throughout
2007, particularly after certain parts of the secondary market ceased to function
and underwriting standards were progressively tightened.

Summary Loss Mitigation Statistics for 2007 - Industry Extrapolation
(thousands of residential loans)
Summary loss mitigation statistics aggregate the Hope Now Alliance data on a quarter over
quarter basis and are extrapolated to an industry estimated aggregate. Quarterly statistics
presented below represent monthly averages.
 60 Days + Delinquency                             Q1             Q2               Q3             Q4
 Total                                               1,082           1,158           1,339         1,553
   Prime                                               492             505             585             698
   Subprime                                            590             653             754             855
 60 Days+ Delinquency (Percent of Total Loans)
 Total                                              2.15%           2.20%           2.51%          2.91%
   Prime                                            1.14%           1.12%           1.26%          1.50%
   Subprime                                         8.23%           8.85%          10.58%         12.37%




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FORECLOSURES STARTED AND FORECLOSURE SALES
COMPLETED

The study collected information on foreclosure activity and trends. Although it has
been widely reported that foreclosures have increased rapidly, it is important to
note that the study found that only one-third of foreclosures initiated actually
result in a completed sale. Frequently borrowers do not respond to their
servicer’s attempts to contact them until they receive their first legal action notice.
HOPE NOW’s borrower outreach initiatives are already increasing the number of
borrowers who respond before a foreclosure action is initiated. Reasons for
avoiding a completed foreclosure sale once a foreclosure has been initiated
include:
        • Borrower brings the loan current
        • Loan is paid in full – may involve refinancing or sale of the property
        • Borrower engages in active loss mitigation with servicer (repayment
            plan, modification, etc.)
        • Borrower files for bankruptcy

Summary Loss Mitigation Statistics for 2007 - Industry
Extrapolation (thousands of residential loans)
Summary loss mitigation statistics aggregate the Hope Now Alliance data on a
quarter over quarter basis and are extrapolated to an industry estimated aggregate.
Quarterly statistics presented below represent TOTAL foreclosure or loss
mitigation actions during the quarter.
                                                     Q1       Q2       Q3       Q4
Foreclosure Starts
Total                                                 316      315      414      458
  Prime                                               139      128      166      182
 Subprime                                             177      187      248      276
Completed Foreclosure Sales
Total                                                 108      118      136      147
  Prime                                                 46      49       54       55
  Subprime                                              62      69       82       92
Completed Foreclosure Sales (Percent of
Starts)
Total                                               34.2%    37.5%   32.9%    32.1%
  Prime                                             33.1%    38.3%   32.5%    30.2%
  Subprime                                          35.0%    36.9%   33.1%    33.3%

Between the first and fourth quarters of 2007 foreclosure starts rose 31% for
prime loans and 56% for subprime loans. Foreclosure sale completions rose
less – 20% for prime loans and 48% for subprime loans, which may simply reflect
the lag of approximately two quarters between the time when a foreclosure is
initiated and when a sale is completed.



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LOSS MITIGATION ACTIVITY – FORMAL REPAYMENT PLANS
ESTABLISHED AND MODIFICATIONS COMPLETED

Servicers have many tools to resolve delinquent loans. These tools fall into three
general categories – forbearance and repayment plans, modifications, and
liquidations. The first two categories involve a continuation of the loan while the
third category results in a termination of the loan and liquidation of the collateral.

Forbearance and repayment plans do not change the contractual terms of the
loan. These plans may involve deferring or rescheduling payments but the full
amount of the loan is expected ultimately to be paid and within the original
contractual maturity of the loan.

A modification occurs any time any term of the original loan is permanently
altered. This can involve a reduction in the interest rate, forgiveness of a portion
of principal or extension of the maturity date of the loan. A common point of
confusion between a repayment plan and a loan modification involves certain
methods of rescheduling payments. If payments are deferred and added to the
final contractual payment as a balloon payment this qualifies as a repayment
plan and not a modification. However, if rescheduled payments are added on to
the end of the loan and the maturity date is extended, this involves a change in
the contractual terms and is considered to be a loan modification.

Typically in the past housing prices have been rising and this has led servicers
generally to prefer repayment plans over modifications. It is the servicers
responsibility generally, but particularly in the case of loans that are in securities
collateral pools, to maximize the present value of cash flows to the investor.
When home prices are rising, repayment plans have been the preferred
resolution when the borrower has the means to make the rescheduled payments.
If the borrower eventually fails to perform on the repayment plan, the servicer can
proceed to voluntary (short sale or deed in lieu) or involuntary (foreclosure)
liquidation with a relatively high degree of confidence that rising collateral values
will minimize loss on disposition of the collateral.

Two things have combined to change this customary approach to loss mitigation
within the last few months. First, declining home prices in many markets have
decisively worsened the financial prospects of failed repayment plans.
Increasingly accepting some financial loss up front through modification of the
terms of the loan in a way that increases the likelihood that the borrower will be
able to continue to make payments and remain current on the restructured loan
will result in a much better financial outcome than a more traditional repayment
plan that brings with it a higher probability of foreclosure and greater loss later
on. As home prices continue to decrease in some markets, it is reasonable to
expect that servicers will seek to modify an increasing percentage of troubled
loans.



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The second reason for an increase in the percentage of troubled loan resolutions
involving modification has to do with removal of various barriers. For example,
we believe the concerted efforts of the HOPE NOW Alliance to contact borrowers
and to work with them to find solutions as early as possible is having a
meaningful impact in helping troubled homeowners avoid foreclosure. Servicers
have long known that successful solutions require early intervention. Once the
borrower has missed several payments, successful resolution becomes much
more difficult, if not impossible. In addition, clarification of accounting ambiguities
involving loss recognition when borrowers are contacted when in imminent
danger of default rather than actual default have facilitated earlier borrower
contact and enabled certain kinds of “fast track” loan modifications such as the
five-year rate freeze on subprime adjustable rate loans that meet specific
requirements. Also, the clarification that a servicer can determine a resolution for
each loan on its own merits rather than be required to deal with the classes of
investors who have rights to different components of the loan’s cash flows has
removed a cloud of risk and enabled servicers to craft loan specific resolutions.

Summary Loss Mitigation Statistics for 2007 - Industry Extrapolation (thousands
of residential loans)
Summary loss mitigation statistics aggregate the Hope Now Alliance data on a quarter over quarter basis
and are extrapolated to an industry estimated aggregate. Quarterly statistics presented below
represent TOTAL loss mitigation actions during the quarter.

                                                                          Q1       Q2      Q3      Q4
Formal Repayment Plans Initiated
Total                                                                       261     270     320    332
  Prime                                                                     106     103     120    137
 Subprime                                                                   155     167     200    195
Modifications Completed
Total                                                                        54      65      76    141
  Prime                                                                      25      30      30     37
 Subprime                                                                    29      35      46    104
Homeowners Helped (Repayment Plans Initiated + Modifications
Completed)
Total                                                                       314     335     396    473
  Prime                                                                     130     133     150    174
  Subprime                                                                  184     202     246    299

While the total number of delinquencies rose 44% from the first quarter to the
fourth quarter of 2007, formal repayment plans rose only 27% but loan
modifications rose 166%. These trends were even more pronounced for
subprime loans. Delinquencies rose 45%, repayment plans rose 26% and loan
modifications rose 259%, clearly reflecting an accelerating servicer shift toward
modifications as a resolution tool.




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STATE AGGREGATE DATA
Delinquencies

State aggregate quarterly data for 2007 for delinquencies, foreclosures started,
foreclosure sales completed, repayment plans established, loan modifications
completed and average monthly repayment plan inventory in shown in Tables 1-
6 in the State Data Appendix.

While the state level data is too comprehensive to summarize here, there are
certain highlights and trends worth noting. Five states are featured: Arizona,
California, Florida, Michigan and Ohio. The first three are states that
experienced substantial housing price bubbles in recent years and are now
experiencing some of the greatest declines in housing prices. The latter two
states – Michigan and Ohio – did not participate in the housing price bubble but
have experienced extremely weak economic growth.

Prime 60 Days+ Delinquency (Percent of Total Loans)
                Q1        Q2         Q3         Q4
 Arizona        0.51%    0.54%      0.72%      1.06%
 California     0.40%    0.45%      0.63%      1.03%
 Florida        0.86%    0.95%      1.24%      1.76%
 Michigan       2.06%    1.89%      2.10%      2.34%
 Ohio           2.08%    2.00%      2.17%      2.27%
National        1.14%    1.12%      1.26%      1.50%

Subprime 60 Days+ Delinquency (Percent of Total
Loans)
               Q1        Q2        Q3          Q4
 Arizona       4.61%     4.46%     7.63%     10.93%
 California    6.83%     8.61%    11.49%     14.93%
 Florida       6.51%     7.98%    10.62%     13.74%
 Michigan     12.45%    12.70%    14.41%     15.64%
 Ohio         11.53%    11.60%    12.85%     13.69%
National       8.23%     8.85%    10.58%     12.37%

There are clear differences in delinquency trends between the two sets of states.
Housing bubble states began 2007 with prime and subprime delinquencies below
the national average, but by the end of the year subprime delinquencies were
catching up with or had exceeded the upward trend for the nation as a whole.
While delinquencies in the weak economy states were above the national
average throughout the year, the difference narrowed for both prime and
subprime delinquencies as the year progressed. This pattern leads to a concern
that if the housing bubble states experience weak economies in coming months
the potential increase in both prime and subprime delinquencies could be
substantial in those states



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Trends in Foreclosures Started and Foreclosure Sales Completed

Again there is a definite difference in foreclosure trends between the housing
bubble states and the weak economy states. The trend in foreclosure sales
completed in the weak economy states is flat and declining relative to the trend in
foreclosures initiated. A possible interpretation of this trend may have to do with
efforts in these states to find alternative solutions for at-risk homeowners to help
them stay in their homes. The trends in housing bubble states in both
foreclosures initiated and foreclosure sales completed are sharply upward. The
trend in completed sales is worse than the trend in foreclosure starts. A possible
interpretation of this trend is that the decline in home prices may be limiting
alternative resolution options for many troubled homeowners in these states.

Foreclosures Initiated - Trend (Q1 = 100)
                  Q1       Q2     Q3      Q4
 Arizona           100      144    163    209
 California        100      116    169    173
 Florida           100      118    175    223
 Michigan          100      109    138    144
 Ohio              100       94    114    117
National           100      100    131    144

Foreclosure Sales Completed - Trend (Q1 =
100)
                 Q1    Q2       Q3      Q4
 Arizona          100   136      230    327
 California       100   149      213    293
 Florida          100   140      209    245
 Michigan         100    93      102      95
 Ohio             100   114      111    107
National          100   109      126    136

Trends in Loss Mitigation Activity (Formal Repayment Plans and Loan
Modifications)

The trend in formal repayment plans is up in all states but more so in the housing
bubble states. That is to be expected because of the more rapid increase in
delinquencies in the housing bubble states. However, it is clear in all states that
the upward trend in loan modifications completed is much greater than the
upward trends in delinquencies and in formal repayment plans, which clearly
indicates that servicers increasingly are working with borrowers to modify the
terms of their loans. The upward trend in loan modifications is much more
pronounced in housing bubble states.




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Formal Repayment Plans - Trend (Q1 =
100)
             Q1     Q2     Q3     Q4
 Arizona     100    133     141    152
 California  100    115     132    142
 Florida     100    114     143    160
 Michigan    100    103     125    125
 Ohio        100    100     113    107
National     100    104     123    127

Modifications Completed - Trend (Q1 =
100)
               Q1    Q2      Q3     Q4
 Arizona       100   162     195    543
 California    100   187     284    918
 Florida       100   141     185    413
 Michigan      100   139     159    336
 Ohio          100   121     138    232
National       100   122     195    543


CONCLUSION
Members of the HOPE NOW Alliance are responding aggressively to the
mortgage crisis. As the crisis deepens a greater percentage of troubled
borrowers are contacting their servicers, often through counseling agencies, and
doing so sooner. By connecting more at-risk borrowers earlier with their
servicers, and through greater emphasis by servicers on alternative loss
mitigation solutions, an increasing number of borrowers in difficulty are avoiding
foreclosure and staying in their homes.




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