55-75% of HAMP Mods Could Re-Default under Fitch Projections
The Home Affordable Modification Program (HAMP), which so far falls short of expectations for completed modifications, is likely to display similar re-default trends seen in other modification programs, according to Fitch Ratings. In a structured finance special report today, analysts at the credit-rating agency noted that residential mortgage-backed securities (RMBS) servicers have stepped up loss mitigation resolutions, with modifications accounting for 70% of all mortgage workouts. As of May 2010, Fitch noted that roughly 15% of non-agency RMBS loans by balance -- including nearly 35% of RMBS subprime loans -- received at least one modification. This is up from 10% and 25% respectively in September 2009. Fitch currently expects anywhere from 55% to 75% of modified loans within RMBS to re-default after 12 months. "Fitch continues to believe that, when properly done, modifications can benefit both homeowners and RMBS investors," analysts wrote. "However, modification performance or sustainability continues to be affected by the borrowers’ desire to keep their property, as well as having sufficient cash flow to make the modified payments." HAMP, which provides incentives for servicers that modify mortgage payments to within 31% of the borrower's debt-to-income ratio, is structured to maintain a borrower's cash flow and ability to remain current on payments, Fitch said. But existing modification programs with similar guidelines show substantial re-default behavior. The agency projects 65-75% of modified subprime and Alt-A loans, and 55-65% of modified prime loans, will redefault within 12 months of modification, including redefaults on already re-modified loans. The below illustrates historical re-default trends among private-label RMBS, not including loans receiving subsequent modifications: Additionally, roughly 15% of all modified private-label RMBS loans receive additional modifications. For example, of all modifications performed in Q109, 18% were since re-modified, with another 6% liquidated at a loss since modification. "It is apparent that structuring the modified payment so the borrower can afford to make the payment over a sustained timeframe is a key to success," analysts said. "Additionally, with the current home value of many borrowers putting them in a negative equity, or underwater status, many argue that principal reductions would materially increase the sustainability of modifications." "Recent changes to HAMP modifications, which have introduced the potential for principal write-down, represent the administration’s efforts to address this situation." The Principal Reduction Alternative (PRA), detailed by the Treasury Department in recent guidance, provides services with a new tool to complement HAMP. The PRA program addresses negative equity and could be used to reduce HAMP re-defaults, as the occurrence of re-defaults in rate and term modifications is historically higher than that of principal reduction, according to Deutsche Bank. Write to Diana Golobay.