Nearly half, 45 percent, of October foreclosure starts were redefaults—mortgages which had previously defaulted and were modified unsuccessfully either by the lender or the federal government. About 105,000 redefaults increased total foreclosure starts in October to 232,865, 11.5 percent more than the level of a year ago.
These double losers are flooding the foreclosure inventory at a time when foreclosure sales are so slow that starts outnumber sales by a factor of three to one. The national foreclosure inventory hit an all-time high at the end of October of 4.29 percent of all active mortgages. Some 3.9 million loans are delinquent 90 days or more or in foreclosure, according to Lender Processing Services' November Mortgage Monitor. LPS also reported that processing has slowed to point that the average foreclosure takes 632 days to process and sell.
The result is a huge inventory of empty homes that is still growing faster than it can be absorbed by the marketplace despite fewer defaults. The very existing of this glut of foreclosed properties, even if they are not yet listed for sale, depresses local home values and delays the housing recovery. Even as overall defaults have declined by about 30 percent, redefaults have increased this year, from about 32 percent of all defaults in January, increasing the foreclosure inventory with modification failures.
Private sector modifications, not the government's HAMP program, are the primary culprit for the failed modifications. Private redefaults are outnumbering government efforts by a rate of more than two to one, according to a report last month by the Office of the Comptroller of the Currency.
More than 34 percent of the 129,000 private workouts completed in the first quarter of 2010 went two months without a payment within the first 12 months, compared to 19.4 percent of the roughly 100,200 government Home Affordable Modification Program mods completed that same quarter that fell into delinquency again within a year.
"HAMP modifications have generally performed better than other modifications implemented during the same periods," the OCC said. "These lower post-modification delinquency rates reflect HAMP's emphasis on the affordability of monthly payments relative to the borrower's income, verification of income, and completion of a successful trial payment period."
Since HAMP launched in March 2009, participating servicers started more than 791,000 permanent modifications through August. But the total number by the time the program is scheduled to end in December 2012 will fall far short of the 3 million to 4 million borrowers the Treasury Department originally estimated.
By contrast, private lenders have completed 4.11 million loan modifications since 2007. HOPE Now, an industry umbrella group, reports that 80 percent of the modified loans are performing after six months seasoning. Principal and/or interest payments were reduced in 82 percent of private sector modifications in the third quarter. Modifications where principal and interest payments were reduced by 10 percent or greater accounted for approximately 66 percent (106,000) of all private modifications in the quarter.