Rating Agency Sees Benefit in Loan Modification Strategy
Commenting on a new servicing technique employed by GMAC-RFC in some residential mortgage- backed securities deals, Fitch Ratings said that loan modifications can be a useful loss mitigation technique when appropriate steps are taken to minimize losses and protect investors.
However, Fitch said that the ability of the servicer to administer and report modifications within the parameters of the deal as well as the type of modifications without appropriate controls could result in increased credit enhancement requirements.
"A servicer that utilizes unlimited modifications or modifications without appropriate controls could result in increased credit enhancement. Alternatively, a highly rated servicer combined with the appropriate controls and modification limitations could result in minimal to no increase in credit enhancement," Fitch said.
The new servicing technique to be performed by GMAC-RFC's Homecomings unit, which has received Fitch's highest ranking as a residential primary servicer, will allow for the capitalization of unpaid interest and other delinquent amounts as a loss mitigation alternative to foreclosure. As a result of certain controls put in place by GMAC-RFC, Fitch has determined that it was not necessary to increase credit enhancement levels to GMAC-RFC's March transactions that will utilize this servicing strategy.
Under GMAC-RFC's previous pooling and servicing documents, GMAC-RFC was able to modify the interest rate or term of any mortgage loan that is in default or foreseeable default. Under the revised PSA agreements, GMAC-RFC, through Homecomings, will now allow certain borrowers to capitalize unpaid interest and certain foreclosure costs by re-amortizing these amounts over the term of the loan.
This capitalization modification may be done only once during the life of the loan. It will not allow for the creation of a balloon loan by adding delinquent interest and foreclosure costs on the last payment date of the borrower.
Before the new modification standards were finalized, Fitch carefully reviewed GMAC-RFC's process for selecting loans that would qualify for capitalization. The enhanced loss mitigation program is subject to the following guidelines:
* The borrower must be in default or reasonably foreseeable default in their mortgage payments.
* The determination must be made that the modification is the optimal resolution strategy and must be measured against other available loss mitigation strategies.
* Each borrower will be required to demonstrate capacity to satisfy contractual loan obligations as well as the desire to retain homeownership. The borrower has to met certain financial hardship, mortgage and property requirements set forth in GMAC-RFC's servicing policies and procedures.
* All final loan modifications, including capitalizations, will be limited to a cap of 5% of the total pool at issuance.
* The capitalization amount will be limited to nine months of principal and interest, one year of property taxes, and one year of homeowner's insurance and other hard costs, including foreclosure and legal fees.
* An interest rate reduction cannot reduce the interest rate on a mortgage loan below one-half of the mortgage rate at issuance.
* The final maturity date for any mortgage loan may not be extended beyond the final legal maturity of the transaction.
In addition, Fitch said that investor reporting will provide detailed information of such modification techniques to allow for accurate monitoring of future performance of these loans through liquidation or payoff. Loans modified through capitalization, as well as loans that have interest rate reductions and term extensions, will be reported separately.
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