Loan workouts outpace foreclosures statewide

The California Department of Corporations today released a survey of state-licensed loan servicers, showing the monthly pace of loan workouts increased 94% to 31,451 in December from January 2008 and surpassed foreclosures in the final months of last year.

Servicers completed workouts on 85,422 loans in the fourth quarter, helping borrowers keep their homes. That’s 85% more than the 46,183 houses and condos foreclosed upon during the quarter. DataQuick previously reported banks foreclosed on fewer properties than in Q3 because of a state law enacted in September requiring them to talk to borrowers at least 30 days before filing a notice of default and discuss options to avoid foreclosure.

In the third quarter, servicers finished 74,122 workouts, a few less than the 79,511 foreclosures that period.

However, the Department of Corporations does not track the number of workouts that redefault. Nationwide government data has shown some 50% to 60% of borrowers who got a break on their loan early last year defaulted again within six months.

Some experts say the best way to prevent redefaults is to lower the amount, or principal, that borrowers owe at or below market value. But state data, as shown in the table, reveal servicers almost never reduce principal. It’s easy to understand why. That means taking a loss on a loan without gaining control of the collateral. (Note: table totals do not add up to 100% because I left off some categories.)

The survey covers more than half of outstanding loans in the state, but most nationally licensed servicers, such as Wells Fargo, are not included. The biggest servicer of all, Countrywide, continues to participate in the survey even though it is now part of Bank of America.

Since the survey doesn’t cover all mortgages, total workouts are likely outpacing foreclosures by a larger percentage than the survey suggests, and may have outpaced foreclosures in Q3.

A few more survey highlights:

* Short sales, when a bank lets a borrower sell his home for less than he owes, doubled on a monthly basis over 2008 to 13% — still a small percentage overall.
* Forebearance, when a borrower makes up late payments without getting a break in interest or debt, decreased from 20% in January ‘08 to 12% in December.
* Paid-in-full, meaning the borrower paid all missing payments and all other debt owed, dropped from 23% to 7%. I assume this is because few people who are in trouble financially have enough equity left in their home to sell it and walk away unharmed