Though there were not as many U.S. mortgage borrowers receiving modifications to their distressed and defaulted mortgage loans of late, the delay will be short-lived, according to Fitch Ratings in a new report.
Loan modifications have declined over the last few months due to the recent implementation of the Home Affordable Modification Program (HAMP). With the trial period for these modifications coming to a close, they should become finalized mods. However, servicers report that many borrowers are not providing the required documentation and often do not make the required trial payment, according to Managing Director Diane Pendley.
‘Ultimate mod performance or sustainability will still primarily hinge on whether the borrower wishes to keep the property, as well as having sufficient cashflow to make the modified payments,’ Pendley says. ‘While the HAMP guidelines ostensibly allow for sufficient cashflow for the new modified housing payment, recent evidence is showing that borrowers may still be unable, if their other debts are excessive, or unwilling to continue making payments on a home where they will see little or no timely possibility for equity return.’
If the borrowers do not complete the HAMP trial modification requirements, servicers will be expected to either offer their own version of a modification or work with the borrower to find another solution to their problems. What this most likely leads to is a short sale, deed-in-lieu or foreclosure, Fitch reports. Loans that do not meet the basic requirements for modification, or where the borrower redefaults after a modification, are expected to once again increase the number of assets entering bank-owned status.
At the end of 2008, Fitch projected that 65% to 75% of defaulted mortgage loans would default again within 12 months – a projection that still stands. What is important to note upon a closer look within this projection is that 11% of all securitized modified loans, including 17% of the loans modified in the third quarter, have failed their first mod and have received a second modification.
‘With all servicers being directed to use [HAMP] as a first step, the effectiveness of [HAMP] figures to be a material outlier as to how successful loan modification as a workout strategy will be over time,’ Pendley adds.
SOURCE: Fitch Ratings