Amie Breton
(617) 727-2543

MARTHA COAKLEY

ATTORNEY GENERAL

“The nationwide foreclosure crisis is at the root of the current situation on Wall Street.   Loan modifications stabilize the marketplace, stop the escalation of foreclosures, and ensure cash flow so that mortgages and mortgage-backed investments can again be valued,” said Attorney General Coakley.  “As this report confirms, meaningful loan modifications simply are not occurring, despite the industry’s promises to the contrary.  As Congress considers a $700 billion bailout package, it is our hope that wide-scale mortgage loan modifications will be a condition of any plan. A bailout that does not build in solutions to the foreclosure-driven downward value spiral will not fix the root of the problem.” 

The working group’s report, which summarizes data from a group of the largest mortgage servicers for the period January through May 2008, outlines several key findings. The third report also uses the data provided from the first two reports to provide trend comparisons.  Major findings of the Foreclosure Working Group included:

• Nearly eight out of ten seriously delinquent homeowners are not on track for any loss mitigation outcome.  In prior reports, seven out of ten homeowners were not on track for any loss mitigation outcome.  This already disappointing ratio has become even worse, with 40,000 fewer loans in loss mitigation in May 2008 than in January 2008. 
• New efforts to prevent foreclosures are on the decline, despite a temporary increase in loan modifications through 2^nd Quarter 2008.  Unlike other data reports, both loan work-outs in process and those that have been finalized (closed) were tracked.  The number of homeowners working toward a loan modification has declined by 28% between January and May, falling to a level not seen since late in 2007.  This decline stands in stark contrast to the 51% increase in loan modifications closed over this same period.  This declining trend of new loans in process suggests that new loan modification approaches have been tailored to a limited group of homeowners.  Instead of expanding loan modification options to reach a broader set of homeowners, more loss mitigation is being directed to selling homes short of foreclosure.  In January, modifications in process outnumbered short sales in process by four to one; in May, that ratio had dropped to two to one. 
• One out of five loan modifications made in the past year are currently delinquent.  The high number of previously-modified loans currently delinquent indicates that significant numbers of modifications offered to homeowners have not been sustainable.  Recent reports identify that many loan modifications are not providing any monthly payment relief to struggling homeowners. While banks and Wall Street firms continue to report record write-downs of mortgage loan portfolios and securities, these losses do not appear to be flowing down to homeowners in the form of sustainable loan modifications.  We are concerned that unrealistic or “band-aid” modifications have only exacerbated and prolonged the current foreclosure crisis.
• Three hundred thousand subprime loans are in the process of foreclosure as of the end of May 2008.  Thirty-eight percent (38%) of seriously delinquent subprime loans are in the process of foreclosure, with over 131,000 foreclosures completed on subprime loans in May 2008 alone.  Delinquency and foreclosure rates remain high and have a ripple effect through housing, mortgage, and financial markets.

Attorney General Coakley submitted testimony earlier this month to the U.S. House Committee on Financial Services on the mortgage industry’s lack of action on loan modifications.  The Attorney General’s written testimony outlined the office’s findings with regard to the implementation of loan modifications in Massachusetts. The testimony specifically noted that loan modifications are not being achieved in significant numbers and that when they do occur, they often do not result in a sustainable loan. 

The testimony revealed the outcome of an analysis the Attorney General’s Office conducted on 144 loan modification documents, reflecting all loan modifications filed in 14 counties.  The office found that:

• Not one of the 144 loan modifications reduced the principal mortgage balance of Massachusetts; and  
• Virtually none of the 144 loan modifications reduced the monthly payments for Massachusetts homeowners, so the distressed loans are no more affordable after “modification” than before. 

The testimony also highlights attempts made by the Attorney General’s Office and other Massachusetts authorities in light of the state’s new 90 day right-to-cure law, which took effect May 1, 2008.  Lenders and servicers were urged to use that 90 day period as a real opportunity for loan modifications, not simply a new procedural hurdle for foreclosing attorneys.  As such, state officials engaged some of the nation’s largest creditors, asking them to agree to a loan modification protocol to ensure that avoidable foreclosures did not take place.  Despite these discussions, not one of the creditors with whom the Attorney General’s Office and other officials engaged in discussions were willing to take any of the suggested steps toward meaningful modification programs.  As a result, Massachusetts, like the rest of the country, is still not witnessing real loan modifications in significant numbers.

The State Foreclosure Prevention Working Group, which was formed nearly one year ago, is a joint initiative of 37 states Attorneys General and the Conference of State Bank Supervisors (CSBS.)  The group’s main objective is to work with subprime mortgage loan servicers to reduce the number of foreclosure by encouraging loan modifications and other sustainable long term solutions.  The report includes data on loss mitigation efforts by 13 major residential mortgage servicers. This represents approximately 60 % of the subprime market and encompasses just over 4.6 million subprime loans. Loss mitigation includes a range of foreclosure prevention approaches, from repayment plans to modification of loan provisions.

The State Foreclosure Working Group is led by representatives of the Attorneys General of 11 states (Arizona, California, Colorado, Iowa, Illinois, Massachusetts, Michigan, New York, North Carolina, Ohio and Texas), two state banking departments (New York and North Carolina), and the Conference of State Bank Supervisors.

Assistant Attorney General Christopher Barry Smith, Chief of Attorney General Coakley’s Consumer Protection Division, is Attorney General Coakley’s designee on the State Working Group.

View Attorney General Martha Coakley’s Testimony on loan modifications and PDF of the report prepared by the State Foreclosure Prevention Working Group:

• Testimony of Attorney General Martha Coakley to the U.S. House Financial Services Committee
• Analysis of Subprime Mortgage Servicing Performance

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