Loan Mod Results Making U.S. Foreclosures a Reality
Fitch: Subpar Loan Mod Results Making U.S. Foreclosures a Reality
With loan modifications on a steady decline, the analysts at Fitch Ratings say the common thread running through the industry has become when will the servicer foreclose as opposed to how can a distressed borrower stay in their home.
Fitch’s latest analysis of loan modification trends in non-agency residential mortgage-backed securities (RMBS) shows little improvement in success rates. While moves toward foreclosure alternatives like short sales are modestly improving loss severities, the agency says servicers report borrowers are electing to remain in their property longer by staying through the extended foreclosure process.
In addition, servicers’ reviews of workout options and required mediation, as well as recent documentation defects, continue to push out foreclosure timelines, Fitch notes. The agency says it expects this trend to continue in the near term.
Since the high water mark of 86,500 modifications in April 2009, Fitch’s study reveals that loan modifications have steadily decreased. During December 2010, the agency tallied 36,500 completed modifications – nearly 58 percent fewer that the peak hit 20 months earlier.
“The combined efforts of HAMP [Home Affordable Modification Program] and other mortgage loan modification programs have made little more than a dent in the large volume of outstanding distressed loans,” said Diane Pendley, Fitch’s managing director.
HAMP, in particular, has faced mounting criticism for failing to come close to the numbers originally promised by the administration. Pendley notes that while the government program has failed to meet volume projections, HAMP did assist in standardizing the reduction of payments and focused more attention on the use of modifications.
While mod numbers have fallen off lately, other loss mitigation efforts, including short sales and deed-in-lieu offers, have increased slightly. As of December 2010, Fitch says 53 percent of prime, 34 percent of Alt-A, and 32 percent of subprime liquidations were not by REO sale.
Alternative liquidation methods have resulted in slightly improved loss severities when compared to REO sales, according to Fitch’s analysts. The agency expects the level of these alternative strategies to increase in 2011, although limited by borrower acceptance.
In addition, Fitch continues to expect a majority of modified mortgage loans to default again within a year, though the agency’s projections are now slightly lower than previously reported. Fitch anticipates a re-default rate between 60 percent and 70 percent for subprime and Alt-A loans; and 50 percent to 60 percent for prime loans.
Fitch also points out that procedural defects in servicer’s foreclosure procedures have stalled the process throughout many states and these defects are lengthening already-substantial timeframes for default processing and clearing out of the inventory backlog.
“Based on current and expected inventory, it will take four years to remove the backlog of properties and return the market to balance,” said Pendley.