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Mods and Redefaults Rise

New York-A report shows the Obama administration's Home Affordable Modification program is invigorating servicing shops despite some skepticism and continuing high redefaults.

The Fitch Ratings "U.S. RMBS Servicers' Loss Mitigation and Modification Efforts" report finds that as of April 2009, approximately 7% of RMBS and 18% of RMBS subprime loans in the 2005-2007 vintages had been modified.

Other industry data confirm the trend. Hope Now members and the industry at large modified 127,000 mortgages and completed 143,000 repayment plans in April 2009, totaling 270,000 workouts, "the largest number in any month" since the alliance started to compile data. According to Hope Now executive director Faith Schwartz, alliance members see the program as an opportunity to assist a progressively larger number of homeowners in trouble.

The Fitch numbers compare 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.

Fitch analyst Diane Pendley told MSN that while it will be months before research can determine what impact the Home Affordable Modification program will have on workouts, data are consistent with Fitch's 2008 predictions.

"Fitch projected that 15% of RMBS loans would be modified in 12 months. The market is on track to see this amount by the end of 2009, if not more. Also the redefault numbers we predicted at the end of 2008 are very close to what we are seeing for the first quarter of 2009. The data has verified what we predicted. The only news is the new administration's modification program."

And it is encouraging that while the program and changes in loss mitigation are still a work in progress, RMBS servicers are engaging in more workouts and modifications. Data submitted by RMBS servicers rated by Fitch indicate that they have been responding to the current challenging environment by increasing the overall number of loss mitigation resolutions or workouts, including significantly increasing the number of loan modifications.

The analyst says it is too early to know the effect of the program, but she added, "servicers have already seen a dramatic increase in the number of loss mit cases, including modifications."

Given the desputable positive effect of principal reduction in the success of a modification, Fitch reports that data indicate mods with principal balance reduction higher than 10% still represent less than 4% of all mods performed.

"For all RMBS loans there is now some evidence that higher redefaults are occurring when the principal increases more than 5%, with redefaults after 12 months in the range of 60%-70%," the rating agency said. It also noted that for loans with principal reductions, even over 20%, the redefaults remain high, in the 30% to 40% range after 12 months. Fitch reported 30% to 55% of the modifications by servicers providing data to Fitch resulted in redefault. A review of RMBS data provided by LP for loans modified or indicating modification, a 60-day or more delinquency redefault rate range of 30% to 35% in six months and 55% to 65% in 12 months "falls close to the servicer estimates," Fitch said. The rating agency places a projection for 60 days or more delinquency redefault rates for subprime loans within the range of 65% to 75% after 12 months.

Nonetheless, the new data are not quite enough to say that confidence is returning to the market or reason to think there is light at the end of the tunnel.

"The new data show a much greater number of cases are being worked, and specifically many more mods. However, with the high redefaults still being seen, this means that there will continue to be need for additional efforts."

In the report it is noted that key to a successful modification is sustainability, which depends on the borrowers' willingness to keep the property, and the cash flow they have available for the modification payments, as well as their employment status. Based on information from servicers and data from First American Loan Performance, Fitch places a conservative projection for subprime 60 days or more delinquent redefault rates within the range of 65% to 75% after 12 months.

This forecast also factors in market pressure so servicers are more aggressively pursuing modifications, the continued home price declines, and the overall effect of the economic crisis on the job market.

Home Affordable Modification guidelines, such as $1,000 incentives that reduce the forbearance amount for the borrower each of the five years of the loan, are expected to have a positive impact, Fitch said.

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