Some Hope Along With Skepticism

Government-sponsored loan modification programs and the incentives they provide are invigorating serciving shops. Some experts worry, however, that current efforts are focusing on the lower-risk pools of government-sponsored enterprise loans such as Fannie Mae, Freddie Mac and FHA.

How ready is the industry to deal with modifications of much higher-risk subprime loans such as so-called vintage loans originated in 2005-2007? A recent Fitch Ratings report stresses that despite the transitional state of changes in loss mitigation, data submitted by RMBS servicers rated by Fitch indicate that they "have been responding to this challenging environment by increasing the overall number of loss mitigation resolutions or workouts, including significantly increasing the number of loan modifications."

Findings by "U.S. RMBS Servicers' Loss Mitigation and Modification Efforts" represent good news not also because as Fitch analysts state, as of April 2009, approximately 7% of RMBS and 18% of RMBS subprime loans in the 2005-2007 vintages had been modified. It compares favorably with December 2008 Fitch projections that over the following 12 months RMBS servicers would modify up to 15% of vintage RMBS mortgages, up from virtually none in 2007.

"When properly done," according to Fitch analysts Diane Pendley and Thomas Crowe, authors of the report, "Modifications can benefit both homeowners and RMBS investors."

It certainly is the key to success in all modifications. It is, however, legitimate for mortgage industry insiders to be a little skeptical about the future of the market.

"A combination of subprime, alt-A, and loans securitized by Wall Street banks created many of the issues we have now," says Greg Hebner president of MOS Group, Irvine, Calif.

"I still haven't seen any workable solution for those borrowers and they are going to bet hit hard in 2010 and 2011. When interest rates start to recover those margins are going to go way up, so we'll start seeing people with 8%-9% interest rates and terrible credit scores."

It is an issue that poses obvious questions. For example, what's going to happen to those payments? Who's going to modify those loans?

The aforementioned Fitch report stresses how findings and the new data, "notwithstanding the changes in loss mitigation under way," give a special meaning to this sign of increased confidence in the marketplace.

The general expectation is that the federal government is working on loan modification solutions that serve well all various segments of the default loan market.

Mr. Hebner finds that while the first part of the government assistance is wisely using tax money to help, there are big question marks as to what would be the best solutions in some of the country's most problematic states, such as California, "the subprime capital of the world."

"There's no program out here for borrowers who took out a subprime mortgage. It's really difficult. Everyone is still staying away from it," he said. "If you look at statistics most of Fannie and Freddie underwriting was done pretty well. These loans are conforming, full doc, they had down payment, mortgage insurance - so they are more workable and lower risk than those crazy no-money-down, no-doc loans."

Another problematic area many want to stay away from when it comes to loan modifications and investing is Las Vegas. "At least GSE loans are lower risk and more manageable. Many Las Vegas borrowers have a $500,000 loan on a $200,000 worth property - who's dealing with it?" he said.

Skepticism is healthy for the market, but I think it is worth remembering that slowly but surely the positive signs that are surfacing give us hope.