Nearly a Quarter of Non-Agency RMBS Loans Modified

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11 · 03 · 11

A new report indicates that nearly a quarter of all loans included in private-label residential mortgage-backed securities have been modified. The ratio is much higher on subprime RMBS.

During September, 32,800 new modifications were completed on securitized residential mortgages. The volume of modification activity was less than half of the 86,400 loans that were modified in April 2009.

Fitch Ratings, which reported the data, explained that the slowdown is the result of an increase in the number of borrowers who either don’t qualify or declined a modification offer.

The latest activity brings to 24 percent the share of non-agency RMBS loans that have been modified.

Zeroing in on just securitized subprime mortgages, the cumulative loan modification rate jumps to 48 percent.

But Fitch noted that more recently completed modifications are performing better than earlier modifications.

Between 45 percent and 55 percent of all recent loan modifications are expected to re-default within 12 months. Earlier projections had between 50 and 60 percent of modified prime mortgages and between 60 and 70 percent of modified subprime and Alt-A loans re-defaulting.

“This indicates that standardization of mod guidelines helped to focus attention on creating more sustainable loan mods,” the ratings agency explained. “These features included affordability of payments, priority in mod features and targeted interest rate reductions.”

But Fitch warns that loans in deeper distress won’t be resolved by existing modification programs.

The New York-based company said that an increase in foreclosure alternatives like short sales has cut loss severities compared to real-estate-owned sales. But the improvement is being offset by growing timelines to resolve seriously delinquent loans.

The longer timelines are an indication that many borrowers are choosing to stay in their properties longer during the extended foreclosure process — though faulty foreclosure documentation, moratoriums and court delays are also taking a toll.

Around 60 percent of prime mortgage liquidations were resolved without a completed foreclosure as of September. On Alt-A loans, 41 percent were liquidated outside of REO sales, while the subprime share was 39 percent.

Mortgage Expert

Mortgage Daily Staff