A lack of proactive moves by subprime mortgage servicers on loans facing resets may lead to another wave of downgrades, one agency is warning.
Servicers have modified just 1 percent of loans that have recently reset, according to a survey of 16 subprime servicers by Moody's Investors Service announced today. Servicers queried in the report, which examined activity from January through July, reportedly manage $950 billion in loans -- or roughly 80% of the subprime servicing market.
"Subprime loan servicers have only recently begun to undertake material loan modifications related to interest rate resets," Moody's said.
The loans analyzed had resets in January, April and July, the New York-based rating agency said.
Few subprime servicers have begun to make outbound telephone calls to borrowers who face resets -- with most relying on passive letter contact, according to the report.
"The industry's approach could mean that many borrowers will not be successfully contacted, lowering opportunity for loan modification," Senior Analyst Michael Drucker said in the statement.
Further downgrades could result from the lack of adequate activity, Nicolas Weill, chief credit officer for Moody's structured finance group, stated in the announcement.
"Based on these survey results, the number of future loan modifications by subprime servicers on loans facing reset may be lower than needed to mitigate losses meaningfully," Weill said. "In light of the current trend and the collateral performance further rating downgrades actions on subprime RMBS issued in late 2005 and 2006 could be necessary."