Report: Large Redefault Rates Likely

odifications are on the rise, but chances of those mods redefaulting remain high, according to a new report from Fitch Ratings. Between 65% and 75% of loans will fall into 60+ day buckets 12 months after modification, Fitch analysts Diane Pendley and Thomas Crowe project in ‘U.S. RMBS Servicers' Loss Mitigation and Modification Efforts.’ The report, which examines information from Fitch-rated servicers and data from First American Loan Performance, notes that loan mods continue to increase, with 7% of overall residential mortgage-backed securities and 18% of subprime loans modified through the end of April. Servicers' loss mit efforts are facing an uphill battle, however, having to contend with the effects of a recession, shrinking disposable income and mounting job losses. Reports from servicers indicate that a portion of borrowers are positioning themselves to receive a relief loan mod to improve their position, Fitch says, adding that some homeowners may be resorting to deceptive practices. "[M]ore often than not, reducing the home payments to an affordable level may not be enough to rescue borrowers who are overextended on other credit and expenses," Pendley says. Additionally, weak housing markets and the spread of negative equity are causing borrowers – even those who can afford modified loans – to abandon their homes. "The more home prices continue to drop, the more likely that even capable borrowers will be making the decision to walk away from their underwater property," Pendley says. Modifications that result in affordable payments hold "clear value" for many homeowners, she adds. With servicers that are participating in the Obama administration's Home Affordable Modification Program (HAMP) having only recently begun implementing guidelines, HAMP's impact on redefault rates is yet to be seen, Fitch says. SOURCE: Fitch


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