Loan workouts good for you and the bank?

By Joyce Koh, MarketWatch
Last update: 5:48 p.m. EDT Aug. 12, 2008NEW YORK (MarketWatch) -- At a
recent event in downtown Washington, D.C., thousands of distressed
homeowners swamped an event held by an advocacy group to help them
with the crippling costs of their mortgages.
At the end of the five-day event, the Neighborhood Assistance
Corporation of America, a Boston housing-advocacy group, had submitted
workout plans for 10,000 homeowners. It expected get half of these
loans modified within two weeks.
"We are getting anyone who has not received their solutions to call
their congressman and senators, to get their friends, family and
neighbors to call the CEOs of banks. We are giving them all their
addresses and phone numbers," said Bruce Marks, NACA's chief
executive, estimating that tens of thousands of homeowners will be
mobilized.
"The only problem is CEOs have a lot of property and there are a lot
of doors to knock on. But it's personal, and we're going to make it
personal."
Even without such tactics, people all over the country already are
starting to pay less interest and are being given more time to pay off
their home loans.
'Analysts pay close attention to the volumes and trend of
nonperforming loans, and that's a key performance indicator that
analysts zero in on.'
— Alison Utermohlen, Mortgage Bankers Association
For those who get to stay in their homes, that's a relief. For banks,
the results are more mixed; if people pay off their modified loans
consistently, this could boost balance sheets. But analysts are
skeptical how big of a lift this would be, and whether people in
distress can keep up with their payments even with new terms.
Modified loans are placed on nonperforming status and monitored for
half a year. They are then generally moved to performing status when
borrowers pay on time for six consecutive months.
"Analysts pay close attention to the volumes and trend of
nonperforming loans, and that's a key performance indicator that
analysts zero in on," said Alison Utermohlen, associate vice president
of government affairs at the Mortgage Bankers Association.

The pace of loan modifications has quickened in recent months.
According to data from Hope Now, modifications made up 42.2%% of total
workout plans in June, or 76,000 modifications, compared with 18.6%% in
July last year, or 23,000 modifications.
About 220,000 modifications were completed in the second quarter, as
opposed to 64,000 in the same period last year.
Modification less of a loss
According to research by FBR Capital Markets, the projected loss
severity for a bank from a loan modification was 12%%, compared with
42%% in case of foreclosure.
Byron MacLeod, a financial analyst at Gradient Analytics, said that
with fewer bad loans, he would expect charge-offs to flatten out,
boosting capital-reserve levels. What's more, banks may stop posting
huge provisions to their loan-loss accounts, lifting the pressure on
their quarterly earnings.

"The growth in [nonperforming loans] up to now has been a significant
concern, and the alleviation of this concern would be de-facto
positive," added McLeod.
Bank of America Corp. (BAC:BAC
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BAC, , ) , which assumed a big chunk of mortgage loans when it bought
lender Countrywide Financial, expects to modify or work out at least
$40 billion of such troubled loans by the end of next year.
The nation's largest home-loan provider said that modification plans
jumped 958%% to more than 21,000 in June, from about 2,000
modifications in the same month last year. Since the start of the year
through June, loan modifications make up more than 70%% of all home-
retention plans for Bank of America -- up from less than a third last
year.

Wachovia Corp. (WB:WB
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WB, , ) , smaller than B. of A. but also based in Charlotte, N.C.,
said that roughly $1.5 billion out of its $7 billion of nonperforming
assets are modified loans.
The large chunk of modified loans on banks' books these days is
nothing new. But Wachovia recently provided a glimpse of how these
loans actually are performing, putting the glass half-full.
"Our experience has been reasonably good in that 50%% of these modified
loans remain current with their modified terms after about six
months," said its chief risk officer, Donald Truslow, who will retire
once a successor is named.
But analysts say Truslow is highlighting that half of those on
modified loans are not keeping up with their payments, and that such a
high percentage could reflect trends in the industry.

Moody's Investors Service, for instance, announced last month that
more than two of every five subprime borrowers whose mortgages were
reworked in the first half of 2007 are defaulting, based on a survey
of 10 servicers managing $550 billion of loans.
The ratings agency nevertheless said that recently reworked loans
might perform better, as lenders increasingly lower interest rates and
offer changes to consumers with fewer missed payments.
'Once a borrower gets into trouble, it's very hard to get out of it.'
— Paul Miller, FBR Capital Markets
This has not swayed some. "Once a borrower gets into trouble, it's
very hard to get out of it," said Paul Miller, managing director and
group head of financial services research at FBR Capital Markets.
On whether banks' performance will be boosted by a decline in
nonperforming loans as people make regular payments, he commented:
"The new stuff that's coming on is just overwhelming, and there's so
much noise out there for this to make an impact."
Others, however, maintain that while the impact on share prices or
valuations might be small, declining nonperforming assets are
important to watch.

"It's pretty significant in finding out where the bodies lie and what
skeletons lie in the closet," said Art Hogan, chief market strategist
at Jefferies & Co. "It's part of what makes the financial system work,
knowing what things are marked at and how much they're worth."

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