Early launch of streamlined loan mods boosts mortgage market: FBR
Freddie Mac’s decision to kick off the streamlined loan modification program for delinquent borrowers is a boost to mortgage specialty servicers and originators with legacy enterprise representation and warranty exposure, analysts say.
The program, which was scheduled to begin on July 1, received an early launch this week.
The initiative provides delinquent borrowers with Fannie Mae and Freddie Mac-backed loans a new, lower mortgage payment, FBR Capital Markets said in a new report.
Fannie Mae's program was already in effect, but Freddie Mac changed the course of the market by advancing its launch date more than two months.
"In an effort to increase participation, this program removes the requirement that borrowers have a financial hardship and drops all documentation requirements of previous programs," analysts for FBR Capital explained.
The streamlined modification program will provide borrowers with a 4% interest rate, extend mortgages to 40 years and provide principal forbearance on loans with a mark-to-market loan-to-value (MTMLTV) ratio of more than 115%, the report noted.
A spokesperson for Fannie Mae said the GSE's original announcement made streamlined loan mods available to servicers immediately. Yet, it also said servicers were "required to implement these policies for borrowers who are eligible for a Streamlined Modification on or after July 1, 2013."
The Federal Housing Finance Agency initially announced the streamlined mod program in March in an effort to boost modifications.
For borrowers to be eligible for the program, their loans must be owned or guaranteed by the government-sponsored enterprises and must be between 90 days and 24 months delinquent. The program is scheduled to run through August 2015.
As of March 31, 2013, Fannie Mae has approximately 528,000 seriously delinquent loans and Freddie Mac has 397,000 for a total of 925,000 loans, the FBR report states.
These loans represent an unpaid principal balance of $83.5 billion at Fannie and $55 billion at Freddie for a total of $138.5 billion.
Additionally, a total of 74% of Fannie Mae’s seriously delinquent loans and 73% of Freddie Mac’s seriously delinquent loans are more than 180 days past due, almost all of which are more than one-year delinquent.
"The GSEs do not break out what is outside the 24-month cutoff, but given the delays in the foreclosure process, it is likely a decent percentage of SDQ loans," FBR Capital Markets analysts explained.
Mortgage insurers do not pay claims following a modification and only pay a claim following a foreclosure and a transfer of title.
Put simply, more modifications will mean fewer claims.
"We could see some increase in new delinquency if additional borrowers seek to strategically default in an attempt to qualify for this program. This could affect EPS numbers, but these would unlikely result in a claim," according to FBR Capital Markets.
Meanwhile, this program provides incentive payments to servicers of $400 to $1,200 per successful modification, depending upon days delinquent.
Thus, the removal of documentation requirements should reduce the cost structure for successful modifications.
"What is yet to be seen is how this program could potentially reduce the pressure on Fannie and Freddie to transfer servicing from legacy originators to specialty servicers," the analysts stated.
They concluded, "Successful modifications reduce foreclosures. Fewer foreclosures equal fewer putback requests for violations of reps and warranties, providing a boost to legacy originators."