Recently Modified Loans Redefault at a Faster Pace
Loans that had modifications completed since 2014 are redefaulting faster than those modified in previous years, according to a report from Fitch Ratings.
The cumulative default rate of loans there were modified in 2015 was higher than any modification since 2010, Fitch found based on its analysis of Fannie Mae's loan-level historical data. Overall, 75% of the loans that redefaulted did so within the first two years following modification.
These redefault rates are reflective of the credit backgrounds of borrowers receiving modifications.
"Relative to prior years, recent trends indicate more modifications made to borrowers that have prior failed loan modifications, lower payment reductions and lower credit scores," Fitch Director Samuel So said.
Fitch analyzed roughly 700,000 loans that had unpaid principal balance of $135 billion at modification that were permanently modified between 2010 and 2015. As of March 2016, 448,000 of those loans were active with an outstanding balance of $75 billion, while the rest had redefaulted or were prepaid.
Fitch found that loans modified more recently had lower average FICO scores and a higher number of prior modifications. In 2009, the average FICO score was 655, and only 1% of loans had multiple modifications. By 2015, the average FICO score dropped to 592, and 34% of the loans had multiple modifications.
These two factors were found to be among the four biggest drivers of redefaults, along with the amount of payment reduction and the mark-to-market loan-to-value ratio.
Performance also varied by the modification program. The standard modification program has the highest cumulative redefault rate, while the Home Affordable Mortgage Program had the best with the streamlined modification program in the middle. That said, loans in the standard program may not be eligible for HAMP, and loans in HAMP and the standard modification program can get modified into the streamlined program, which could contribute to these rates.