Banks giving short-term help to mortgagors

Row homes valued at $400,000 each, which are offered for free in a "buy one, get one free" deal, are seen in Escondido June 3, 2008. (REUTERS/Mike Blake)

WASHINGTON (Reuters) - The biggest U.S. banks that service more than 23 million mortgages totaling $3.8 trillion have focused on short term relief for troubled borrowers rather than permanent changes to mortgage conditions to prevent foreclosures, a top U.S. banking regulator said on Wednesday.

"Payment plans predominated, outnumbering loan modifications in March by more than four to one," said John Dugan, head of the U.S. Office of the Comptroller of the Currency.

"But loan modifications increased at a much faster rate during the period" from October through March, Dugan said in prepared remarks to be delivered at an American Securitization Forum conference in New York.

Regulators and lawmakers have been highly critical of banks for the slow pace of loan modifications to help troubled borrowers stay in their homes, especially after highly touted government-backed plans to do so.

The OCC study confirmed more people are falling behind on their monthly mortgage payments and home foreclosures are on the rise.

Payments late 90 days or more increased to 226,500 in March from 188,356 in October, according to the report. In that time frame mortgages in the process of foreclosure jumped to 1.23 percent of the banks' portfolio from 0.9 percent.

Surprising is that the overall mortgage servicing portfolio of the nine banks reflects credit quality that is "relatively satisfactory and relatively stable," Dugan said.

In February, the OCC ordered nine of its regulated banks to provide home-loan performance data on a monthly basis going back to October. The move came after the agency was criticized by state attorneys who said the OCC was hampering a study on foreclosures.

OCC officials said the study is intended help with bank supervision so they can be more informed of the dynamics in the mortgage market, and if needed, take prompt corrective action at the banks in order to maintain their safety.

The nine banks participating in the OCC study are Bank of America <BAC.N>, Citibank <C.N>, First Horizon <FHN.N>, HSBC <HSBA.L>, JPMorgan Chase <JPM.N>, National City <NCC.N>, USBank <USB.N>, Wachovia <WB.N> and Wells Fargo lt;WFC.N. Dugan noted that data showed seriously delinquent subprime loans resulted in fewer new foreclosure starts than those troubled prime or Alt-A mortgages. From October to March new foreclosures involving prime and Alt-A mortgages rose from 23,105 cases to 24,054 cases, while subprime related cases dropped from 15,998 to 12,084. New foreclosures for all categories peaked in January. "One possible explanation is that the national emphasis on developing alternatives and assistance programs has been targeted to subprime borrowers, allowing a higher percentage of these borrowers to stave off foreclosure," Dugan said. At the end of March, much of the loss mitigation efforts by banks resulted in 30,906 loan modifications, compared with 135,973 payment plans. A payment plan involves short-to-medium term changes in scheduled payments so that a borrower becomes current. This plan has also drawn criticism because it may not fully help a borrower, whereas a loan modification involves changing the loan contract including the interest rate to reflect a borrower's ability to repay over the life of the loan. The study also shows that about 94 percent of the mortgages were current and performing from October to March, meaning that payments on 6 percent of mortgages were consistently falling behind at least 30 days. The OCC study also said given that 62 percent of all mortgages in the banks' portfolios were prime, it was not surprising that in February and March prime mortgages saw more new foreclosures. Subprime mortgages were 9 percent of the total portfolio, according to the study. At the end of March, there were 283,988 total foreclosures in process. Of those 30 percent involved prime mortgages and 21 percent were Alt-A mortgages, the OCC found. Another 33 percent involved subprime mortgages. Dugan said he hopes to eventually combine the results of the OCC study with the Office of Thrift Supervision, which is conducting a similar examination of its institutions. "If we could combine our results in future reports, the coverage would extend to 60 percent of all outstanding mortgages," Dugan said. The OCC study can be found at http://www.occ.gov/ftp/release/2008-65b.pdf. (Reporting by John Poirier;)