Trial Modification Success Still Up in Air

New York-An end of 2008 Fitch projection that 65%-75% of delinquent mortgages would redefault again within 12 months still stands.

Fitch pointed to "implementation requirements" tied to the government's Home Affordable Modification Program as one of the reasons behind an overall decline in the number of loan modifications.

Initial data released by the Congressional Oversight Panel for the Troubled Asset Relief Program showed that as of September 2009 only 1.26% of trial modifications under HAMP turned into permanent, or successful, modifications.

Of the 27 participating large banks and servicers, Ocwen Loan Servicing, emerged as the star servicer by converting up to 13.9% of its trial modifications. Currently Ocwen said its conversion ratio has increased to 20% and is climbing. Ocwen alone completed 44.6% of all permanent loan modifications reported by the industry by September, thus collecting almost half of all HAMP servicer incentive fees paid so far, and if the loans continue to perform in 2010 and 2011, the bank will receive second- and third-year related bonus fees. Ocwen president Ronald Faris said the success rate was achieved thanks to the upfront implementation of technology, analytics and detailed re-underwriting. To make a modification possible servicers must obtain and verify all HAMP-required documentation and receive three monthly payments on a modified loan.

As the industry awaits for the loan modification trial period to end, "servicers report that many borrowers are not providing the required documentation, and often do not make the required trial payment," said Fitch's managing director, Diane Pendley.

Another risk is the potential for repeated defaults on modifications.

A closer look of the aforementioned projections, Fitch said, shows that 11% of all RMBS modified loans, including 17% of the loans modified in the third quarter, have failed their first modification and have received a second modification.

Fitch stressed that if borrowers do not comply with all HAMP requirements, servicers have to either provide their own modification or most likely offer a short sale, deed-in-lieu, or foreclosure.

"With all servicers being directed to use the HAMP modification program as a first step, the effectiveness of the HAMP program figures to be a material outlier as to how successful loan modification as a workout strategy will be over time," Ms. Pendley said.

The ultimate modification performance depends on both homeowners' desire to keep the house and their financial ability to do so, Ms. Pendley said.

"While the HAMP guidelines ostensibly allow for sufficient cash flow for the new modified housing payment, recent evidence is showing that borrowers may still be unable, if their other debts are excessive, or unwilling to continue making payments on a home where they will see little or no timely possibility for equity return."

Looking for solutions, servicers and housing advocacy groups are suggesting additional flexibility within government assistance programs and focusing more intensely on unemployed or underemployed homeowners who need federal assistance to qualify for a modification.

According to Ocwen chairman and CEO William Erbey, during a brainstorming event with 30 representatives from grassroots organizations and housing advocacy groups, participants agreed the industry should work closely with the Department of Treasury to arrive at more flexible guidelines so more distressed homeowners qualify for mortgage modifications under HAMP.

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