Though fewer borrowers received modifications in recent months, the delay will be short-lived and soon, according to Fitch Ratings in a new report.
Loan modifications have declined over the last few months due to recent implementation of the Home Affordable Modification Program (HAMP). With the three month trial period for these initial modifications coming to a close, numbers of finalized modifications shout increase dramatically. Only about 7000 have finalized to date.
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. Under the HAMP program, many borrowers were about to enter trial modification without providing complete documentation and in some cases, the trial period is being extend so that documentation can be provided.
‘Ultimate mod performance or sustainability will still primarily hinge on whether the borrower wishes to keep the property, as well as having sufficient cash flow to make the modified payments,’ said Managing Director Diane Pendley. ‘While the HAMP guidelines ostensibly allow for sufficient cash flow 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. Loans that do not meet the basic requirements for modification, or where the borrower re-defaults after a modification, are expected to once again increase the number of assets entering REO status.
At the end of last year, Fitch projected that 65%-75% of defaulted mortgage loans would default again within12 months, a projection that still stands. About 11 percent of all Residential Mortgage Backed Securities (RMBS) modified loans, including 17 percent 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 the HAMP modification program as a first step, the effectiveness of the HAMP program figures to be a material outlier as to how successful loan modification as a work-out strategy will be over time,’ said Pendley.
For a copy of the Fitch report, click on link at the top of the story.