Fitch: Loan Mods to Cushion Credit Shock

Fitch Ratings believes that the growing volume of loan modifications will mitigate payment reset defaults on LIBOR-indexed subprime, adjustable-rate mortgages. Fitch estimates that at the recent mid-October peak, subprime borrower payments could have increased by 30% to 50%, particularly for loans with deep initial teaser rates. Fitch managing director Roelof Slump said, "While LIBOR has been trending lower from its recent highs, it continues to be of concern, as it directly impacts borrower affordability, and ultimately collateral and bond performance." Fitch estimates that $418 billion of subprime ARMs are outstanding. Fitch said that approximately 1.8 million loans, accounting for $347 billion in outstanding principal balance, are on average half a year away from either their initial payment reset or their next payment reset. The six-month London interbank offered rate was the most widely used index for adjusting payment levels on subprime ARM loans, according to Fitch. Fitch noted that loan modifications have increased, citing Hope Now's calculation that mortgage servicers provided modifications on 212,000 borrowers in September, an increase of 23% from the August total.