Subprime ARMs Defaulting, Despite Loan Modifications

Analysts with Moody’s Investors Service said earlier this week that a whopping 42 percent of subprime adjustable-rate mortgages modified during the first half of 2007 had become 90 or more days delinquent by the end of March 2008. That number goes up over 50 percent when you look at previously-modified loans now 60 or more days delinquent.

In the industry, this is called recidivism; and seeing such high recidivism rates among modified loans is the newest wrinkle for a housing collapse that, so far, has been full of them. After all, what does it mean if those borrowers with renegotiated loan terms end up defaulting on them anyway?

“Defaults like this aren’t the result of borrowers needing a small fix to their loan,” said one source, a loss mitigation executive that asked not to be identified. “They’re the result of borrowers so far in over their collective heads, either on credit or affordability, that there is little that can really be done to save the house”

To be fair, not all loan modifications are made equal. Moody’s ascribed the high delinquency rate among the modified loans to servicer reliance on principal deferment and arrearage capitalizations on seriously delinquent loans. In comparison, the agency said recent modification efforts have instead favored interest rate reductions, and about half of these more recently-modified loans have been less than 60 days delinquent at the time of modification — meaning servicers are getting more aggressive with their loss mitigation efforts, and earlier on in the default cycle.

Both shifts would seem, on the surface, to help lower recidivism rates going forward; but then again, most probably assumed that loan modifications wouldn’t fail at a 50 percent clip, either.

Despite strained resources and and streched cash flow, Moody’s found that servicers have been picking up the pace on loan modifications. As of the end of March 2008, 9.8 percent of subprime ARMs with interest rate resets in the preceding 15 months had been subject to a modification of some sort; by comparison, in December, a similar survey found only 3.5 percent of resetting subprime loans being modified.

“The rise can be attributed to a number of factors, such as increased outreach to borrowers on the part of servicers and non-profit third parties, increased attention from legislative bodies, the media and advocacy groups, and attempts across the industry to streamline the modification process,” said Moody’s managing director Warren Kornfeld.

For more information, visit http://www.moodys.com.

Side notes: For subprime borrowers whose ARMs reset in Q1 2008, 29.6 percent of active loans at reset were already 90+ days delinquent, in foreclosure, bankruptcy or REO inventory … that percentage stood at 17.9 percent for loans resetting in Q4 … 20.6 percent of active subprime loans resetting in Q1 2008 were modified or on a workout plan by the end of March.