The Dec. 31 expiration of the Home Affordable Modification Program will have a limited negative effect on residential mortgage-backed securities from 2008 or earlier, according to a report from Moody's Investors Service.
When HAMP expires at the end of 2016, the number of loan modifications is expected to decline, though servicers' proprietary modifications should help soften that blow. The impact to RMBS will be limited though because loan modifications have had a waning impact on loan performance in recent years as the number of modifications has decreased.
In 2010, there were roughly 393,000 modifications for borrowers with loans that were included in private-label RMBS pools. By 2015, that number had dropped sharply to 114,000, largely due to improvements in property markets and the overall economy leading to fewer defaults. Moody's estimated that HAMP loans account for 40% or less of these modifications.
RMBS will see some degree of negative impact from the expiration of HAMP, since pre-2009 pools will no longer benefit from these modifications. Still, analysts at Moody's wrote that servicers are likely to step in to fill some of the gap left by the program.
For starters, the analysts note that regulatory loss mitigation solicitation requirements still push servicers to offer modifications, including the Consumer Financial Protection Bureau's requirement that they contact delinquent borrowers within 36 days of their first missed payment to inform them that loss mitigation options may be available.
Servicers will also likely provide modifications when it pays to do so.
"Servicers will also be motivated to replace HAMP modifications with proprietary ones because modifications are often in the best financial interests of the RMBS transaction that owns the loans," the analysts wrote in the note released Tuesday.
"They will offer modifications when they calculate that the potential value of modified monthly cash flows to the transaction exceeds the value that it would likely gain from recoveries garnered through a foreclosure sale or a short sale."
But the volume of modifications is unlikely to reach the levels it did under HAMP because servicers will no longer receive the financial incentives the program afforded them, the analysts cautioned.
