More aggressive modifications in recent quarters somewhat offset lower "quality" of borrowers after Q309 as the number of months delinquent at the time of modification grew, according to Barclays Capital
Macroeconomic factors, the extent of modification and borrower pay history act as the largest drivers of re-defaults, researchers said. And the middle determiner -- extent of modification -- has grown more aggressive since the beginning of the Administration's Home Affordable Modification Program (HAMP).
BarCap researchers expect re-default rates on all 2008 modifications to be near 80-90%, although modifications done in 2009 should generally perform much better.
For HAMP-specific modifications, the performance should be helped by the program's required three-month trial period. Barring any "material changes" to HAMP guidelines, BarCap expects an overall re-default rate of 60-65% in the program.
BarCap expects house prices to drop another 7% nationally before beginning a slow recovery. This stable housing should help re-default rates.
And, since forbearance modifications historically perform better than simple rate reductions, more aggressive modification programs are likely to help performance in the future. The degree to which payments are reduced through forbearance plays a big role in determining the performance of the modification:
"The question is if more aggressive modifications result in improved performance. On a given loan, the answer has to be an unequivocal yes," researchers wrote in a recent securitization research report. " However, when looking at pools, one could argue that more aggressive modifications are a sign of greater borrower distress or need for a bigger reduction in payment for the borrower to perform."
The "quality" -- or degree of delinquency -- among borrowers in HAMP is likely to improve in the future, as HAMP "is running out of delinquent loans" and will accept newly delinquent borrowers in the future who managed to remain current during 2008 and 2009, analysts said.
Write to Diana Golobay