According to the State Foreclosure Prevention Working Group — a group of state attorneys general and state banking regulators working together under the Conference of State Bank Supervisors to prevent home foreclosures — industry efforts and measures to keep homeowners out of foreclosure have slipped.

“Too many homeowners face foreclosure without receiving any meaningful assistance by their mortgage servicer,” the report concluded, “a reality that is growing worse rather than better, as the number of delinquent loans, prime and subprime, increases.”

The State Foreclosure Prevention Working Group issued its third Analysis of Subprime Mortgage Servicing Performance, based on data collected from subprime mortgage servicers for February through May 2008. The report — which was issued late-September prior to the U.S. government’s $700 Billion Troubled Asset Relief Program and to Countrywide’s mandatory loan modification program — revealed nearly eight out of ten seriously delinquent homeowners are not on track for any loan work-out or loss mitigation assistance that might enable them to avoid foreclosure, a higher percentage than the Group found in its April 2008 report.

The September report concluded: “While some progress has been made in preventing foreclosures, the empirical evidence is profoundly disappointing.”

Servicers appear to have reached the ‘low-hanging fruit’ of subprime loans facing interest rate resets, while not developing effective approaches to address the bulk of subprime loans which are in default before interest rate resets,” the report said. “Based on the rising number of delinquent prime loans and projected numbers of payment option ARM loans facing reset over the next two years, we fear that continued reactive approaches will lead to another wave of unnecessary and preventable foreclosures.”

The report says “the number of loans on track for a loan modification has declined precipitously” in recent months. “The mortgage industry’s failure to develop systematic approaches to prevent foreclosures has only spurred declines in property values and further increased expected losses on mortgage loan portfolios,” according to the state officials’ new report.

Major findings from the Analysis of Subprime Mortgage Servicing Performance report include:

1. Nearly eight out of ten seriously delinquent homeowners are not on track for any loss mitigation outcome. Previously, seven out of ten homeowners were not on track for any loss mitigation outcome. “This already disappointing ratio has become even worse, with 40,000 fewer loans in loss mitigation in May 2008 than in January 2008, the report said.
2. New efforts to prevent foreclosures are on the decline, despite a temporary increase in loan modifications through the 2nd Quarter of 2008. The number of homeowners working toward a loan modification has fallen to a level not seen since late in 2007. This 28% decline of loan modifications in process between January and May stands in stark contrast to the 51% increase in loan modifications closed over this same period. This declining trend of new loans in process suggests that current loan modification approaches have been tailored to a limited group of homeowners. Instead of expanding loan modification options to reach a broader set of homeowners, more loss mitigation is being directed to selling homes short of foreclosure. In January, modifications in process outnumbered short sales in process by four to one; in May, that ratio had dropped to two to one.
3. One out of five loan modifications made in the past year is currently delinquent. The high number of previously-modified loans currently delinquent indicates that a significant number of modifications offered to homeowners has not been sustainable. Recent reports identify that many loan modifications are not providing any monthly payment relief to struggling homeowners. “We are concerned that unrealistic or ‘band-aid’ modifications have only exacerbated and prolonged the current foreclosure crisis, the report said.
4. 300,000 subprime loans were in the process of foreclosure as of the end of May 2008. Thirty-eight percent (38%) of seriously delinquent subprime loans are in the process of foreclosure, with over 131,000 foreclosures completed on subprime loans in May 2008 alone.

Since October 2007, the State Foreclosure Prevention Working Group has been collecting data from the largest subprime mortgage servicers, with 13 of the largest 20 servicers participating, representing approximately 60% of subprime mortgage loans serviced. The Group includes representatives of the Attorneys General of 11 states (Arizona, California, Colorado, Iowa, Illinois, Massachusetts, Michigan, New York, North Carolina, Ohio and Texas), two state banking departments (New York and North Carolina), and the Conference of State Bank Supervisors.

Back at the beginning of February, Arizona Attorney General Terry Goddard said the mortgage industry “needed to reach out to more homeowners at risk of foreclosure if the nation’s housing crisis is to be brought under control.” Now, just three months later, Goddard isn’t letting up. Citing a new national report on subprime mortgages, Goddard last week said efforts of servicers and government officials to prevent foreclosures have increased but still fall short of the need to effectively respond to the foreclosure crisis and prevent millions of unnecessary foreclosures. The report, “Analysis of Subprime Mortgage Servicing Performance,” was issued last Tuesday by the State Foreclosure Prevention Working Group, a group of state Attorneys General and banking regulators working to prevent home foreclosures.

Major findings of the report include:

1. Seven out of 10 seriously delinquent borrowers are still not on track for any loss-mitigation outcome. The number of borrowers in loss mitigation has increased, but it has been matched by an increasing number of delinquent loans.
2. Data suggest that servicers’ loss-mitigation departments are severely strained in managing the current workload. The report noted that almost two-thirds of all loss-mitigation efforts started are not completed in the following month.
3. Homeowners who do receive loss-mitigation help are most likely to receive some form of loan modification. The Working Group said such modifications are a solution that seems to offer better long-term prospects for successful resolution of problem loans. Many servicers are replacing their use of repayment plans in favor of loan modifications.

The State Working Group said it believes “more robust approaches to avoid preventable foreclosures are necessary.” The Working Group said servicers, investors and state officials should work together on:

• Developing a more systematic loan work-out system to replace the intensive, individual, “hands-on” loss-mitigation approach. The Group says it continue to work with servicers to promote systematic solutions to modify loans in a more streamlined and efficient manner.
  

• Slowing down the foreclosure process to allow for more work-outs. Targeted efforts to slow down subprime foreclosures may give homeowners and servicers more time to find solutions to avoid foreclosure, the report says. Many states have enacted or are considering such measures, according to the report.

The State Foreclosure Prevention Working Group began as a cooperative dialogue of state officials and mortgage servicers in September of 2007. Since October of 2007, the Working Group has been collecting data from the largest subprime mortgage servicers, with 13 of the largest 20 servicers participating, representing approximately 60% of subprime mortgage loans serviced. The Group is led by representatives of the Attorneys General of 11 states, including Arizona, California, Colorado, Iowa, Illinois, Massachusetts, Michigan, New York, North Carolina, Ohio and Texas); two state banking departments (New York and North Carolina); and the Conference of State Bank Supervisors.

For more info, read Analysis of Subprime Mortgage Servicing Performance (Warning: clicking on the preceding link will download a 30-page PDF file).