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May 26th, 2009

Report: Recession Hurting Loan Mod’s Success



Washington’s public push to solve the problems of the housing market could wind up revealing just how bad their solutions are. According to a Fitch Ratings report released today, up to 75% of modified loans could fall 60 days delinquent within just 12 months. The report, which studied mortgages issued between 2005 and 2007, said poor economic conditions were the main reason why loan modification isn’t working as well as hoped.

“While U.S. [residential mortgage-backed securities] RMBS servicers are ramping up loan workouts to aid distressed mortgage borrowers, they are in for a lofty battle to mitigate the effects of recession, shrinking disposable income, escalating job losses and possibly some deceptive practices on the part of the borrowers themselves,” according to FitchRatings.com.

From the Wall Street Journal:

A key finding from the Fitch report was that subprime, pooled loans that have been modified are souring at high rates despite a change in the loan terms. Fitch said a conservative projection was that between 65% and 75% of modified subprime loans will fall 60-days or more delinquent within 12 months of the loan change. That finding echoes prior U.S.-bank-regulatory agency reports of high redefault rates for modified loans.

The Fitch report also raised questions about whether a decrease in a home-loan amount, known as principal reductions, is an optimal loan modification. Some mortgage-loan experts believe that the best way to help borrowers is to reduce the principal amount owed. The Fitch report found that loans that had decreased principal amounts, including by more than 20%, were still redefaulting in a range of 30% to 40% after 12 months.

According to HousingWire.com’s Jacob Gaffney, 7% of all RMBS and 18% of subprime loans were “redrafted through the end of last month.”

Even modifications that lowered a borrower’s principal amount have proven unsuccessful. Loans with principal reductions — some even over 20% — have redefault rates of 30%-40% after 12 months.

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2 Responses to “Report: Recession Hurting Loan Mod’s Success”

  1. Mandelman Matters to Your Loan Modification Business Says: May 27th, 2009 at 2:23 pm

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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