Servicers Cut Principal on 10% of Mortgage Mods, Numbers Expected to Rise

HousingWire - By Jon Prior

Mortgage servicers included principal reduction on 10.2% of modifications in the first quarter, up from 3% one year ago, according to the Office of the Comptroller of the Currency.

OCC data only covers roughly 60% of the entire mortgage market. Principal reduction took place on 10,400 of the reported modifications, up from 9,800 three months prior and more than double the 4,800 in the same quarter last year, according to the OCC report.

Much of the increase came under the Home Affordable Modification Program. The Treasury Department said in January it would triple payments to investors and servicers who conducted principal reduction on workouts under the program.

The data show servicers took them up on the offer. Roughly 20.7% of the reported HAMP modifications included a principal reduction in the first quarter, up from 15.6% in the previous three months and 6.2% in 1Q of 2011.

The more than 7,500 HAMP principal reduction workouts increased by 15% from the end of last year and grew by more than 129% from the first quarter of 2011.

"For the servicers who signed up for HAMP, they're required to run the borrower through HAMP first," an OCC spokesman said of the jump in principal reduction. "Just by that approach, you'll have more action through HAMP. Then you have to look at other proprietary mods."

Bruce Krueger, chief mortgage examiner at the OCC, said the number will go up.

The largest servicers Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial began principal reduction programs under the $25 billion foreclosure settlement in March.

All but Ally, which is regulated by the Federal Reserve, reports modification numbers to the OCC.

"This report does not include any effects of the AG settlement," Krueger said in a conference call with reporters. "You will likely see the effects the principal reduction starting in the second quarter."

Still, roughly half of the modifications completed between 2008 and 2011 redefaulted. When asked, Kreuger said it was difficult to conclude what effect principal reduction has on redefault rates, a struggle for other government agencies as well.

The Federal Housing Finance Agency is still analyzing data to determine whether it will allow Fannie Mae and Freddie Mac to participate in the Treasury HAMP principal reduction program.

"That's really hard to isolate," Krueger said of the effect on redefault rates. "The problem is you never see principal reduction only. You have a combination of things happening such as rate reduction and term extension. Well over 90% of modifications have multiple actions."