Crisis Weighs on Securitized Mortgage Loan Performance

The performance of securitized residential and commercial mortgage loans is expected to further deteriorate in 2010 and for several years to come.

Loss mitigation and modification efforts of servicers of securitized residential mortgage loans have not been able to avoid redefault among "a sizeable amount of these loans."

Commenting on that, and other findings from a recent Fitch Ratings report, Fitch managing director Diane Pendley warned that many distressed mortgage loans, including modified loans, "will not see a final resolution until well into 2012." Other industry resources indicate the effect of the crisis will remain strong on the performance of both the residential and commercial mortgage security markets.

Mortgage Bankers Association findings show the CMBS market will not improve any time soon.

Quarter-to-quarter delinquency rates for all commercial/multifamily mortgage investor groups reviewed by the banking group continued to increase in the first quarter, with securitized loans reaching their highest level since the series began in 1997.

Interventions to improve loan performance though modifications or short sales, which have gained popularity in the recent past, create loss mitigation options but also add pressure to both servicers and borrowers.

In the residential market, assets in short sales are in competition with other distressed properties and will result in a borrower losing a home, says Pendley.

This competition ultimately results in redefault.

Servicers are now praised for making some progress in helping improve loan performance through the Home Affordable Modification Program and for also bringing non-HAMP solutions to the market.

Fitch reports that by May 2010 approximately 15% of all RMBS loans had received a modification either through the federal or the private sector, increasing 5% from September 2009.

During the same timeframe the number of subprime loan RMBS that received at least one modification increased by 10% to almost 35%.

HAMP data so far does not match with stated goals to complete sustainable modifications.

Treasury-imposed changes to HAMP that require servicers to re-analyze and rework every distressed loan file will further impact future progress, says Pendley, and the final determination of HAMP's ultimate effectiveness will continue to be delayed. For example, potential new moratoriums are threatened to not go through and mandated mediations before foreclosures are being required by more states.

Fitch projections reiterate the expectation to see 65% to 75% of subprime and alt-A loans that have been modified will redefault within 2010. Prime loans will perform slightly better at anywhere from 55% to 65%.

So far nearly 15% of all modified RMBS loans went into default and received "at least one additional modification," which is part of the reason why since mid-2009 lenders and servicers were focusing more on short-sale options that minimize losses for both the borrower and the investor. California has emerged as the capital of such sales as up to 50% of all short sales were closed there.

Pendley recognizes that the strategy has benefits, but also warns that assets in short sale are bound to compete with other distressed properties and bring borrowers to foreclosure.

An MBA snapshot of the CMBS market does not look very promising either.

The MBA Commercial/Multifamily Delinquency Report shows that compared to the fourth quarter of 2009 the 30-plus-day delinquency rate on loans held in commercial mortgage-backed securities climbed 1.54 percentage points to 7.24%.

Delinquencies for five of the largest investor-groups reviewed—commercial banks and thrifts, CMBS, life insurance companies, Fannie Mae and Freddie Mac—"remain below levels seen in the early 1990s, some by large margins," the MBA said.

The 60-plus-day delinquency rates increased on loans held in life company portfolios by 0.12 percentage points to 0.31%, on multifamily loans held or insured by Fannie Mae by 0.16 percentage points to 0.79%, and on multifamily loans held or insured by Freddie Mac increased 0.05 percentage points to 0.24%. The 90-plus-day delinquencies on loans held by FDIC-insured banks and thrifts also increased by 0.32 percentage points to 4.24%.

These finding are significant since together these groups hold over 80% of commercial/multifamily mortgage debt outstanding—excluding construction and development loans, which are not presented in the report.

Jamie Woodwell, MBA's vice president of commercial real estate research, attributed the deterioration to the economic weakness noting that unless there is growth "specifically in areas of jobs and consumer spending" the CRE mortgage market will not be stabilizing any time soon.