Banks and government agencies are ramping up their efforts to save troubled home loans, but not fast enough to keep the wave of foreclosures from rising.
That's the message from a government housing report released Monday.
Here are some of the key trends, both bad and good:
• Mortgage problems rose during the third quarter, with 6.2 percent of all loans seriously delinquent (60 days or more past due) and an additional 3.2 percent of all loans in the process of foreclosure. Delinquency among prime mortgages – the largest and highest-quality category – rose significantly.
• Banks and mortgage servicers expanded their efforts to save troubled mortgages by modifying the loans, especially through trial programs subsidized by the federal Home Affordable Modification Program (HAMP). For every six home-loan borrowers who were seriously delinquent or in foreclosure, about one borrower received a permanent or trial loan modification.
• Borrowers with modified loans show a high rate of re-default, but the pattern may be improving. More than half of all modified loans have re-defaulted within six months of the change. But the most recent modifications, ones made during the second quarter, show a lower initial rate of re-default than modifications done in prior quarters. That may signal that lenders are making bigger adjustments in the loans, to make payment more likely.
• Government-backed loan programs are in trouble right along with the rest of the mortgage market. Only 83 percent of loans guaranteed by the Federal Housing Administration or Veterans Benefits Administration are now listed as "performing," down from 85 percent in the second quarter. Some 92 percent of loans owned or insured by Fannie Mae or Freddie Mac (with implicit government backing) are performing, down from 93 percent in the second quarter. For comparison, the report classified 87 percent of all US home loans as performing.
The survey, issued by the Office of the Comptroller of the Currency and the Office of Thrift Supervision, sends a sobering signal, even though other trends in the US housing market have been more positive in recent months. Mortgage interest rates are low, attracting new buyers, and home prices have been stable or rising modestly.
The poor performance of existing loans, however, suggests that the housing market will continue to have a large inventory of distressed properties for sale in the year ahead. This includes both sales of bank-owned properties, and lender-approved "short sales," in which the sales price fails to cover the outstanding balance on the loan.
The real estate firm First American CoreLogic estimates that nearly 1 in 4 home loans nationwide is "under water," with a balance larger than what the house could currently sell for.
Policymakers hope to stabilize the housing market using several strategies. First, the Federal Reserve has been helping to keep interest rates low, but it's possible that rates could rise as the Fed backs off from its program of buying mortgage securities next year.
Second, the Obama administration is encouraging lenders to reduce defaults through loan modifications. "Loan mods" that offer sizable cuts in monthly payments perform much better than less-generous modifications. But the re-default rate remains high for all modifications, possibly because of the tough economy (borrowers losing jobs) as well as because of under-water borrowers who choose to walk away from their mortgage.
A growing number of loan modifications – 13 percent in the third quarter – offered a reduction in the principal balance. Some experts say that's the strategy most likely to prevent re-default. Banks holding loans in their own portfolio were more nimble in writing down principal, while loans held by pools of investors saw virtually no balance reductions.
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