AUGUST 2004

Workout Programs Prevent Foreclosure

Last month we reported on a new program backed by GMAC Residential Funding Corp. that supports credit counseling in order to reduce foreclosure losses on the company's non-conforming mortgage loan portfolio. Now, the mortgage industry newsletter Inside B&C Lending (Bethesda, MD) reports that a new study by Freddie Mac found that loan workout programs have been effective in getting delinquent mortgage borrowers current and keeping them in their homes. The study examined 148,050 loans that became delinquent 60 days or more between January and September of 2001. Performance was tracked for 18 months following the point where the borrower became seriously delinquent. Freddie Mac found that 90% of loans that became 60 days delinquent and then started repayment (workout) programs managed to cure (become current) within 18 months. For loans that hit 90 days delinquent before starting repayment programs, 73% cured within 18 months. For loans that hit 120 days late, 61% cured within 18 months.

The researchers calculated that repayment plans cut the risk of foreclosures by 80% for all borrowers. The gain was somewhat smaller (68%) but still significant for low-to-moderate income borrowers and borrowers in "underserved" neighborhoods. Interestingly, the authors also noted that over half of all loans in the study were made prior to 1998, during the period prior to the advent of automated underwriting processes. Some industry observers have cited the higher quality of loans made due to adoption of automated underwriting as the reason for relatively low foreclosures rates during 2000-2002, despite recession-driven job losses. In contrast, the Freddie Mac researchers speculate that relatively low foreclosure rates during 2001-2002 may have had more to do with the adoption of loan workout programs in the servicing of loans, and less to do with a higher initial quality of loans.