Loan Modification: Identifying what Works

Regulators are crunching better data to identify what works and what fails when it comes to loan modification performance. They hope that by troubleshooting existing mortgage modification strategies, they can create one that finally does the trick to help rescue distressed homeowners.

The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) are expanding the scope of loan modification performance and borrower data that they gather from banking institutions as a way to pinpoint mortgage modification strategies. The goal is to make these loan modifications both affordable and sustainable.  The OTS and OCC are searching for the most effective tactics to use. They look to see, for example, whether borrowers who did loan modifications got reduced monthly principal and interest payments, and whether they caught up or fell behind again, and ultimately defaulted on payments.

Studying loan modification performance

These two agencies will soon issue their highly anticipated Mortgage Metrics Report, which systematically studies and reviews loan modification performance in several ways. They'll particularly look for types of mortgage modifications that: 1) made monthly payments or principal balances rise; 2) reduced payments by at least 10 percent; 3) reduced payment obligations more than 10 percent; and 4) had no noticeable impact at all.

"This is important information on banks' efforts to modify loans, and will help inform lenders and policymakers as to what type of modifications work, with a particular focus on the effect of significant changes in monthly payments," said Comptroller of the Currency, John C. Dugan. "By bringing the same sort of standardized definitions and rigorous analysis to loan modification performance data that we have provided in our previous reports on mortgage metrics, lenders and policymakers can use this information to make loan modification programs more effective," he added.

Mortgage metrics

OTS Director John Reich also called this kind of analysis and reporting an important step in understanding loan modification performance. "We have promised to continually improve this data collection-and-reporting program to ensure that the results are meaningful and useful in the ongoing effort to address the nation's foreclosure crisis," he said. He referred to the Metrics Report as a "meaningful milestone in that effort."

The agencies used to collect data independently, but starting last year, the OCC and OTS launched a joint program that involves data from 35 million mortgages-or more than half of all home loans in the U.S. The variety of information that they solicit from mortgage companies has also increased significantly within the past year, and now they collect nearly twice as much, capturing nearly 2.4 billion pieces of data. They also track mortgage modifications after the fact for approximately 60 days, in order to determine whether or not homeowners defaulted again within the period of time immediately following their loan modification.

Hopefully, their analysis will reveal smart adjustments to current loan modification initiatives. Honing them to ensure higher performance could go a long way toward reversing the foreclosure crisis.