Press Release
For Immediate Release
February 8, 2008
 
Media Contact: Robyn Ziegler
312-814-3118
rziegler@atg.state.il.us
 

MADIGAN AND STATE FORECLOSURE PREVENTION WORKING GROUP RELEASE REPORT ON MORTGAGE ACTIVITIES

Chicago - Attorney General Lisa Madigan and an 11-state Foreclosure Prevention Working Group have issued the first report analyzing the performance of entities that service subprime mortgages. Since last summer, the group has been working to reduce the number of residential mortgage foreclosures by urging servicers of subprime mortgages to undertake loan modifications and other sustainable, long-term solutions to keep homeowners in their homes and out of foreclosure.

The report, “Analysis of Subprime Mortgage Servicing Performance,” summarizes data for the month of October 2007 from a group of the largest subprime mortgage servicers in an effort to measure the extent of the foreclosure crisis and the servicers’ responses to it.  The goal of the report is to provide information that can be used to promote initiatives to reduce the numbers of foreclosures.

“The information in this report is invaluable,” said Attorney General Madigan. “To date there has been a lack of reliable data on the efforts of servicers of subprime mortgages to mitigate losses. This report offers our first glimpse of reliable data on what mortgage servicers are actually doing to provide relief to homeowners facing foreclosure.”

The report stems from a request by the working group to the largest servicers of subprime mortgages. The group asked the servicers to identify and implement comprehensive and systematic programs to prevent unnecessary foreclosures. The report is the first public discussion of this data collection effort and is the first set of loss mitigation data released to the public.

“One of the most striking findings in the report,” said Madigan, “is that the resetting rates on adjustable rate mortgages have not been the largest cause of foreclosures. Instead, a large percentage of subprime adjustable rate loans have become delinquent prior to any rate increase on the loan. This means that these loans were simply unaffordable from the outset.”

The report describes this problem: “weak or non-existent underwriting coupled with high levels of origination fraud combined to produce loans that had no reasonable prospect of being repaid. Rather, these loans were originated based on the assumption that housing appreciation would continue indefinitely and that when borrowers ran into trouble, they would refinance or sell.

With this refinance option now foreclosed from many troubled homeowners, we are seeing the devastating results of these reckless lending practices.”

The report notes that while payment resets on adjustable rate mortgages have not yet been the driving force in foreclosures, action needs to be taken to address these loans before the payment shock that will come when the rates reset.

Among the other key findings, the report concludes:

  • Seven out of 10 seriously delinquent borrowers are not on track for any loss mitigation option.  While some delinquent homeowners are in contact servicers and working toward a modification of their loan, there continues to be a significant lack of interaction between subprime mortgage servicers and homeowners.  The data in the report indicates that the increasing number of loan delinquencies is outpacing the increase in effort to modify loans and mitigate losses.
  • Servicers have increased their use of loan modifications and other home retention options.  A significant percentage of homeowners who are in contact with servicers are working toward a loan modification.
  • The refinance option has nearly evaporated.  In the past, delinquent homeowners with subprime loans were able to search for and find refinancing.  Now, unless we see dramatic changes in available loan products or a rapid reversal in housing prices, the mortgage industry will not be able to refinance its way out of the current, growing crisis.

The data in the report comes from 13 of the top 20 servicers, representing approximately 58 percent of the total subprime servicing market. Of the top 20 servicers solicited for data, seven servicers declined to provide data. Some national banks that service loans declined based on advice from the Office of the Comptroller of the Currency. Madigan and the working group called on the remaining servicers to provide the requested data and on the OCC to urge national banks to report data, so that a complete picture of the subprime servicing market can be provided.

The working group will continue to collect monthly data from servicers and anticipates future reporting on this data. The group also will continue to work directly with the top 20 subprime servicers to remove barriers to increasing the number of loan modifications.

“We will continue to work on all fronts to stem the foreclosure crisis and assist those homeowners who are fighting to save their homes,” said Madigan.

Formed in the summer of 2007, the State Foreclosure Prevention Working Group includes Madigan’s office and the Attorneys General from 10 other states – Iowa, Arizona, California, Colorado, Massachusetts, Michigan, New York, North Carolina, Ohio, and Texas – along with the state bank regulators from New York and North Carolina, and the Conference of State Bank Supervisors.

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