Concern About the Misleading Implications of the OTS/OCC Mortgage Metrics Report

Media 02.5.09

Recipient: Comptroller of the Currency John C. Dugan

The Honorable John C. Dugan
Comptroller of the Currency
U.S. Department of the Treasury
Administrator of National Banks
Washington, DC 20219

Dear Comptroller Dugan:

We write to express our strong concern about the misleading implications of the recently released third quarter 2008 OTS/OCC Mortgage Metrics Report (MMR) that reported high re-default rates for loans modified in the first quarter of 2008. By failing to identify the terms of the modifications underlying the re-defaults, and by defining loans in “default” more broadly than the industry standard, this report leaves the impression that loan modifications are ineffective for foreclosure prevention. However, it is more likely that the highest re-default rates are associated with poorly designed modifications, including modifications that do not reduce monthly payments. Sustainable, affordable loan modifications, on the other hand, can keep families in their homes and benefit investors, financial institutions, and the economy as a whole.

The re-default rates reported in the third quarter 2008 MMR are based on a definition of loan modification that includes all mortgages for which terms are contractually changed with respect to interest rates or other terms of the loan. This likely includes loan modifications that do not lower monthly payments or otherwise result in long-term, sustainable improvements in borrowers’ ability to pay their monthly mortgage payments. Research has shown that many loan modifications fail to reduce monthly payments and do not consider a homeowner’s ability to repay. For example, an analysis by Valparaiso Professor of Law Alan White, a national expert on foreclosure policy, found that as late as November 2008, only 35% of modifications reduced monthly payments below the initial payment, while 18% left the payment the same and 47% actually increased the monthly payment.1

Other studies tracking the results obtained by different types of modifications show that certain types of modifications are much more successful than other types. According to a recent Lehman Brothers analysis, rate reduction modifications result in a more significant improvement in performance than principal and interest capitalizations that add past-due amounts onto the balance of the loan.2 Credit Suisse reports that when interest rates or principal are reduced, the re-default rate is less than half that of these other modifications.3 And the MMR and other research suggest that modifications of mortgages held by a lender rather than pooled into mortgage-backed securities have been defaulting at lower rates4 – supporting the notion that sustainable modifications can be made if obstacles to doing so can be overcome.

We urge the OCC to collect and report data that would break out and clearly identify the different types of loan modifications completed by the reporting institutions. Any meaningful breakout of the types of loan modifications completed should clearly identify those loan modifications that actually reduce monthly payments and result in a long-term, sustainable improvement in the homeowner’s ability to pay the mortgage. Re-default statistics contained in the MMR should be generated for each type of modification. Loan modifications that result in sustainable improvements in the borrower’s ability to repay the mortgage are much less likely to re-default than modifications that raise or fail to reduce monthly payments. Failure to collect and analyze data on such disaggregated basis calls into question any conclusions regarding the effectiveness of loan modifications.

It is also critical that any loan modification re-default analyses be put in proper context by not attempting to measure success too early and by using a realistic measure of default. The third quarter 2008 MMR data attempts to measure the success of loan modifications prematurely as it reflects loan modification activity during the first quarter of 2008, long before streamlined, sustainable loan modification efforts, such as those implemented by the FDIC for IndyMac and by Fannie Mae and Freddie Mac, became active. It also relies on a re-default rate that is based on all loans that are more than 30 days past due, which likely overstates the number of troubled modifications. Mortgages are not considered in default until they are 60 to 90 days past due. The MMR acknowledges that “many factors affect the accuracy of the data during those initial months following modification.” Indeed, the MMR warns readers in a footnote not to rely too heavily on these reported re-default rates for that reason.5

We urge the OCC to use the MMR productively to collect and report meaningful, disaggregated statistics on the success of sustainable, affordable, long-term loan modification efforts. We further urge the OCC to immediately and actively encourage streamlined, sustainable loan modifications—with no delay while it works to improve its reporting on modifications—since substantial research already demonstrates their effectiveness. Sustainable modifications would significantly decrease the number of foreclosures over the next several years and are therefore vital to our economy’s recovery. If we can be of any assistance, please do not hesitate to contact us.


California Reinvestment Coalition
Center for Responsible Lending
Central Illinois Organizing Project
Consumer Action
Consumer Federation of America
Consumers Union
Leadership Conference on Civil Rights
National Association of Consumer Advocates
National Community Reinvestment Coalition
National Consumer Law Center (on behalf of its low-income clients)
National Council of La Raza
National Fair Housing Alliance
National Housing Conference

1 Alan M. White, Deleveraging the American Homeowner: Mortgage Contract Modifications at the end of 2008 (Jan. 12, 2008), p. 11, available at

2 Lehman Bros. U.S. Securitized Products Fixed Income Research, The Loan Modification Story So Far (Sept. 11, 2008) p. 2.

3 Credit Suisse Fixed Income Research, Subprime Loan Modifications Update, October 1, 2008, p.1, available at

4 See MMR, pp. 5-6; see also Tomasz Piskorski, Amit Seru and Vikrant Vig, Securitization and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage Crisis (Dec. 30, 2008), available at (finding that loans owned by a bank in portfolio were 20-30% in relative terms less likely to default than similar loans that were securitized).

5 MMR, p. 18, n.7: “Readers should be cautious drawing conclusions about re-default rates using the data from the first and second months after modifications. While these data are early indicators of performance, many factors affect the accuracy of the data during those initial months following modification.”