Grading on a Curve

Andrew Jakabovics reviews the first report on the performance of mortgage service companies charged with modifying at-risk home mortgages. There’s reason to be disappointed by some of the biggest players.

Treasury today released its first monthly report on the performance of mortgage service companies charged with modifying at-risk home mortgages under the Obama administration’s Home Affordable Modification Program, a hallmark of the federal government’s foreclosure prevention effort. The new report, which is designed to provide the first snapshot of HAMP activity to date and increase program transparency, shows there are essentially two types of servicers participating in the program: those who seem to be trying to adhere to the HAMP guidelines and are making good faith efforts to reach eligible borrowers, and those whose performance is disappointing, even after grading on a curve.

No servicer’s performance is stellar, but it is fair to expect a reasonable ramp-up period for a program of this size to be implemented in large corporations. In their defense, although the program was announced by President Barack Obama in February, the first contracts were not signed until April, and there were several components that were rolled out even later. Thus, even top-performing Saxon Mortgage Services, a subsidiary of Morgan Stanley, has only begun trial modifications on a quarter of its eligible mortgages, which are defined as loans delinquent 60 days or more (including those in the process of foreclosure) on owner-occupied properties. (Ultimately, not all eligible mortgages will qualify for the program, as the modification offer is subject to a net present value test that also takes into account home value, borrower income, and FICO score, among other things.)

At the other end of the spectrum, Home Loan Services, Inc., a subsidiary of Bank of America but under separate HAMP contract, services an estimated 33,000 eligible mortgages. Despite signing on to the program a week after Saxon did in mid-April, the report shows not a single modification offer extended through the end of July.

Even after grading on a curve, however, the wide discrepancies between some of the largest mortgage servicers are disappointing. There are two important numbers to consider when analyzing individual servicers’ performance: the number of mortgage modification offers extended to homeowners, and the number of offers accepted—each as a ratio of total eligible mortgages. The top performers to date extended modification offers to more than 20 percent of their eligible borrowers and began trial modifications on at least 15 percent of the borrowers. The worst performers extended offers to no more than 12.5 percent of their borrowers and none have trial modification rates in excess of 6 percent. In short, trial modifications are at least 2.5 times more prevalent among the “good guys” as the “bad guys.”

But it’s the top four servicers—Bank of America, J.P. Morgan Chase & Co., Wells Fargo, and CitiMortgage, a unit of Citigroup Inc., and their subsidiaries—that require the most attention from policymakers. They collectively service more than 65 percent of the 2.7 million mortgages estimated by Treasury to be eligible for consideration for a modification.

Of the four, J.P. Morgan Chase has done the most. It has made offers to nearly 30 percent of the estimated eligible borrowers in its home mortgage portfolio, with 20 percent in trial modifications. Their acceptance rate is 67.6 percent.

CitiMortgage has done slightly less well, with 21 percent of potentially eligible borrowers offered modifications. Those offers have resulted in 15 percent of its mortgages now in trial modifications. CitiMortgage’s offer acceptance rate of 71.3 percent, however, is the highest among all servicers with more than 10,000 potentially eligible mortgages.

Wells Fargo and Bank of America both fall short of the program’s average performance level of extending offers to 15 percent of borrowers with 8.7 percent in trial modifications. Wells Fargo, when including Wachovia Bank and Wachovia Mortgage—as Wells Fargo acquired Wachovia and its subsidiaries at the end of 2008—has extended offers to 10.3 percent of potentially eligible borrowers and begun trial modifications for 5.5 percent of their mortgages. Their acceptance rate of 53 percent is only slightly below the HAMP average of 57.9 percent. (Wells Fargo’s numbers excluding Wachovia are only slightly better, with offers to 11.8 percent of potentially eligible borrowers with 6.1 percent in trial modifications.)

Bank of America has done the worst among the large servicers, with offers extended to only 12.5 percent of potentially eligible borrowers and trial modifications begun in only 3.5 percent of the cases. (These figures exclude its subsidiary Home Loan Services.) Moreover, its offer acceptance rate of 28.1 percent is less than half the program’s average.

The Obama administration and Congress need to watch these numbers carefully, tracking individual servicers’ performance over the coming months. It is still too early to tell whether the servicers who are lagging behind in this report were simply slower out of the starting gate and will catch up over time or if there are more pervasive problems. The answer to that question will determine what additional steps should be taken to provide greater assistance to homeowners at risk of foreclosure.

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