According to the February Mortgage Monitor Report from Lender Processing Services, FHA loans saw a substantial increase in loan "cure rates" -- loans that were delinquent in the prior month and are now current -- in February.
About 500,000 loans that were mostly one-to-two months delinquent became current in February alone, with most of the improvement coming from FHA loans.
"Historically, we see these seasonal increases in cure rates in February and March each year," Herb Blecher, vice president of LPS Analytics said. "What stood out in this month's data was where that increase was centered. February's rise in cures was driven almost entirely by FHA loans, representing a 29% increase from January, and likely driven by revived modification activity related to the revisions to the FHA's Loss Mitigation Home Retention options released late last year."
In November, the FHA announced changes to its modification program to allow more borrowers to take advantage of its program, including special forbearance options for unemployed borrowers and eliminating requirements that limited lender's ability to assist borrowers. The improvement in cure rates bodes well for the agency, which is facing an estimated $16 billion shortfall in reserves as loans originated at the peak of the boom and in the bust that followed turned sour. The FHA's more recent loans are performing well, with extremely low default rates, thanks to tightened underwriting standards.
The FHA supports lower-income borrowers and first-time home buyers by allowing downpayments as low as 3.5%. Because of its focus on making affordable home loans, it tends to have a higher default rate. The average credit score for an FHA borrower is 707 compared to GSE borrower score of 762, according to LPS. Mortgage modifications overall climbed in the last half of 2012 to 280,000 after two years of steady decline, according to loan modification data from the Office of the Comptroller of the Currency, aggregated by LPS.
Most of the modifications were proprietary as opposed to the government's Home Affordable Modification Program, which has had a checkered record in helping troubled borrowers. LPS expects modification volumes to rise given the recent uptick at the FHA and a new, streamlined modification program at the FHFA. Recent modifications are performing relatively well, compared to earlier modifications according to the OCC's data. -- Written by Shanthi Bharatwaj New York.