The mortgage settlement between U.S. state attorneys general and the five largest servicers, in clarifying foreclosure standards for the industry, may be contributing to higher foreclosure initiation rates, according to a new report from Fitch.
“The AG settlement not only established timelines to evaluate modifications and short sales, but set up guidelines for borrower communication and bankruptcy documentation requirements,” said Fitch managing director Grant Bailey, in response to a question from this publication about what specific standards might be playing a role in this trend.
“As the transition period ends and servicers successfully implement changes, liquidation timelines will likely decrease, as last month’s foreclosure initiation rates may already be indicating,” he said.
Fitch said the clarification of foreclosure standards could be the most significant impact to the settlement so far, noting that foreclosure starts rose to about 12% in June, the highest they have been since the first half of 2009.
The ratings agency also said it remains concerned that the principal reduction portion of the settlement could result in more strategic defaults. But so far, it does not see a material change in the behavior of underwater borrowers nor has it found any disproportionate use of principal reductions in securitizations versus portfolio loans it previously had concerns about.
Fitch said roughly 30% of loan modifications in June included a principal reduction, an increase of almost 20% from February. However, because that figure was increasing prior to the settlement (up from 10% at the start of 2011), the ratings agency suggests this may be more due to a previously existing industry trend. Analysts said they will continue to monitor the settlement’s impact, as it may not have fully surfaced yet.
