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Fitch sees no sign of strategic default for rising principal reductions

Few, if any, borrowers strategically defaulted to take advantage of mortgage servicer relief under the $25 billion settlement struck in March, according to Fitch Ratings.

In fact, the percentage of current underwater borrowers moving to delinquent status, or the roll rate, shrank to 2.8% in June from 3.1% in February, a trend consistent since before a deal was reached with mortgage servicers to settle past foreclosure abuses and provide roughly $10 billion in principal reduction.

More than 11 million borrowers owe more on their mortgage than the home is worth. Some of the largest servicers began reaching out to borrowers in the spring.

"Fitch views strategic defaults as an ongoing concern," the credit ratings agency said in a report Monday. "That said, there does not appear to be any sign yet of a material change in the behavior of underwater borrowers attempting to strategically default to qualify for a reduction."

Roughly 30% of all modifications granted in June included principal reduction, Fitch found, up from 10% at the beginning of the year. Analysts also found no evidence so far that servicers are writing down principal on mortgages securitized into private pools. The settlement credits servicers more for reducing principal on loans held in their own portfolios.

"Although practice varies materially by individual servicer, the combined activity of servicers included in the settlement is consistent with that of servicers not in the settlement," Fitch said. "Thus, it appears some of the increased principal reduction activity in 2012 is likely a continuation of an earlier trend rather than a direct result of the settlement."

The Federal Housing Finance Agency continues to analyze how much a national principal reduction program would cost Fannie Mae and Freddie Mac. Home loans guaranteed by both are excluded from the settlement.

The agency fears underwater borrowers would default on their mortgage even if they were still able to make the payments in order take advantage of the program. According to its preliminary results, only a small percentage of borrowers would need to strategically default in order to wipe out savings Fannie and Freddie would see.

The FHFA recently said updated analysis would be announced "in the near future."


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