Remodifications Continue to Grow in Securitizations
Repeat modifications in securitized product are growing even though the overall modification rate through 2012 was much lower, according to a recent Barclays report.
“We expect the share of remods as a fraction of total mods to continue to grow, particularly in the cleaner sectors,” Barclays securitized product researchers said in their report.
The report finds that around 40% of subprime mods are remods, and about 10%-20% of mods in other sectors are remods.
Investors in these areas should take note of findings on trends in these areas, as the report suggests they are increasingly playing a role in performance.
Remods do not perform as well as initial mods and currently fare better in the prime credit sector than the subprime one, the researchers find.
Eighteen months after modification, first-time mods have a 40%-45% redefault rate, while remods have roughly a 55% redefault rate.
This to some extent reflects the evolution of modifications over time as well as the housing market’s relative recovery. “As the housing market languished in 2011, many of the early mods defaulted. Some early modifications also had very small or no payment reductions…and are now being modified more aggressively,” the researchers noted.
But interestingly, the report also finds that “remods are common even with high prior payment reductions.” They do find that “the bulk of repeat mods are on borrowers with below-average payment reductions in the prior mod” but “somewhat surprisingly…a quarter of the remods are offered on loans that have already been offered a payment reduction of more than 40% in their prior modification.”
The researchers said that “as the amount of payment reduction on remods increases, there should be some improvement in performance. However, we expect the difference between first mod and remod performance to persist.”
Barclays divides the likely catalysts for remods into three categories: remods where the initial mod did not reduce payments enough to avoid defaults, servicers tapping HAMP principal reduction alternatives, and servicing transfers.
The report finds that about 45%-50% of the remods occur 30 months or more after the initial modification, and 75% occur at least 18 months after the first modification.
“Most remods happen within the first 12-18 months of delinquency after the prior mods turn delinquent, with about a quarter coming from modified current loans,” the researchers said in their report.
Some nonbank servicers have relatively higher remod rates that are about twice as high as bank servicers’, the report also notes. Thus growth in remods “is likely to be most pronounced in cleaner deals that transfer over from a bank servicer…to a nonbank servicer.
“We also expect the higher share of remods to lead to longer cash-flows, especially on deals that are part of the servicing transfers announced in the past few months,” the report added.
“Overall, assuming that servicers are making rational decisions on remodifying these loans, the remod should likely be better than liquidation,” the Barclays researchers said. “However, for servicers that are less selective and have higher redefault rates, this benefit could be nonexistent or worse.”