Mods Will Depend More on Servicer Performance

Steps forward in preserving homeownership combined with macro-market environment improvements suggest the future performance of mortgage loan modifications will depend more on differences in servicer-level performance, according to one forecast.

Servicing quality "will be increasingly important," Barclays Capital analysts said.

Industry examples such as SPS, Wilshire and NatCity modifications that have lower-than-average redefault rates, compared to Countrywide modifications that feature higher-than-average redefault rates illustrate that apprehension.

Barclays said loan modification performance and "much of the improvement in redefault rates has been driven by the same positive macro environment" as the performance of unmodified borrowers. For that reason analysts expect redefault rates on 2008 modifications to be close to 80%-90% but 2009 modifications in general should perform much better. Also, if the typical borrower delinquency status at the moment of modification "worsened dramatically" after the third quarter of 2009, that deterioration was "compensated somewhat" by more aggressive modifications.

The most recent Hope Now data show the industry has completed 3.2 million permanent loan modifications since July 2007 of which over 800,000 were completed this year.

Since 2007 mortgage servicers have provided distressed borrowers over 9.5 million workout solutions including repayment plans, forbearance and other foreclosure prevention options. Based on these data show Hope Now reported "significant progress" even though the number of newly delinquent loans is up.

What is shifting in the loan modification arena is a focus on improving overall process efficiencies and a trend showing that more servicers are embarking on non-HAMP custom modifications. And that, according to Barclays "can have significant ramifications for valuations." The hope is that such ramifications will be positive. In fact Hope Now data show 77% of non-HAMP modifications include lower principal and interest payments that allow for "longer-term sustainability of homeownership."

As of now however the ratio has not yet changed in favor of non-HAMP or proprietary modifications. Hope Now reported that in May the industry completed about 159,000 loan modifications: 112,000 proprietary loan modifications and 47,000 HAMP modifications. In total this year 800,536 loan modifications moved into permanent status. Since July 2007 over 3.2 million homeowners have saved their homes using a combination of proprietary loan modifications and HAMP options. Hope Now data show a significant discrepancy between the number of foreclosure starts that totaled 205,479 and the number of foreclosed loans sold that totaled 98,963. While nobody can foresee how many of these loans will be saved and how many could turn into REOs, more distressed loans are getting into the system. Various other reports confirm a stabilization in delinquency rates may persist in 2010 but may not be sustainable. Barclays expects overall HAMP redefault rates to be anywhere between 60% and 65%. The reason, analysts said, is that early HAMP modifications that came from a deeply delinquent inventory of borrowers are expected to perform worse than borrowers who managed to keep paying through 2008-2009. In addition servicers will have to deal with new delinquencies and modifications. Hope Now reported up to 3.77 million loans that represent 7% of the total number of loans and 3.7 million borrowers remain 60 or more days past due.

Nonetheless, Hope Now managing director Faith Schwartz is optimistic the industry's foreclosure prevention strides will lead to further advances in loss mitigation efficiency.