Fitch: Modified Mortgages Still Pose Credit Risks for U.S. Banks

Mon Apr 1, 2013 1:22pm EDT

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(The following statement was released by the rating agency) CHICAGO, April 01 (Fitch) Improving conditions in the U.S. housing market and modest declines in foreclosure activity have yet to translate into a material reduction in credit risk for residential mortgages that have been modified since 2008, according to Fitch. Weak asset quality trends, particularly for loans modified in the 2008-2010 period, continue to support our view that troubled debt restructurings (TDRs) should be included in Fitch-calculated nonperforming asset (NPA) metrics. While U.S. loan servicers continued to report somewhat better modification results through the third quarter of 2012, in part as a result of payment reductions negotiated under the government's Home Affordable Modification Program (HAMP), we regard the high delinquency and foreclosure rates for recently modified mortgages as reflective of still elevated residential mortgage asset quality problems. Furthermore, opaque and inconsistent disclosure practices by large servicers make it difficult to assess the underlying asset quality of the modified loans for individual institutions. The OCC's most recent survey of performance data for loans serviced by selected national and federal savings banks (accounting for 57% of all U.S. residential mortgages) indicated that 10.6% of all serviced mortgages were not current as of Sept. 30, 2012. Particularly for older vintage (pre-2011) loans, the total share of modified mortgages that were in some stage of delinquency or in the foreclosure process remained at very high levels. According to the OCC breakdown of asset quality, 2.9% of all loans were 30-59 days past due, while 4.4% were "seriously delinquent" (60 days or more past due). The share of OCC-surveyed loans at some stage of foreclosure as of 3Q12 was 3.3%. Ongoing asset quality challenges made clear in the OCC data highlight the need for better public disclosure by servicers of underlying post-modification mortgage performance. Reporting practices remain inconsistent, and banks may apply different standards in reporting the level of TDR activity in any period. Their disclosures of payment default activity may differ, and breakouts of non-performing loans after modifications have been made can vary significantly. As we noted in our December 2011 report "Troubled Debt Restructurings: First Look at Re-Default Rates and Disclosures," banks are only required to disclose the number and value of TDRs that had "payment defaults" within 12 months of classification as a TDR. As a result, performance data beyond the 12-month period are not available at the bank level, and banks' classification of defaults may vary. The OCC data point to the still uneven track record of mortgage modification efforts. Performance has only been publicly disclosed in the OCC report since 2008. Since that time, however, only 47.7% of the 2.9 million modified loans in the survey were either current or paid off as of 3Q12. The remainder were split between some stage of delinquency (21.3%), foreclosed or in the foreclosure process (15.0%), or no longer in the servicer's portfolio (16.1%). Despite incremental progress toward a stabilization of TDR asset quality, the overall picture points to a continuation of broadly weak asset performance in mortgage portfolios, especially for those large regional banks and global trading institutions that together hold approximately 91% of all accruing TDRs for U.S. banks rated by Fitch. We believe that inclusion of accruing TDRs in NPA calculations remains the best approach, since mortgage asset quality is still weighing heavily on overall NPA ratios for the large banks. Contact: Julie Solar Senior Director Financial Institutions +1 312 368-5472 Bain Rumohr Associate Director Financial Institutions +1 312 368-3153 Bill Warlick Senior Director Fitch Wire +1 312 368-3141 Fitch, Inc. 70 W. Madison Chicago, IL 60602 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research Troubled Debt Restructurings here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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