Delaying the Inevitable Re-Default

Fitch Ratings is joining a growing chorus of voices that say the recent refi deluge will not likely stave off an eventual mortgage re-default for the majority of takers. Auction companies HousingWire is speaking to for its July 2009 feature on the topic are predicting the same outcome. Fitch’s conclusion is outlined in a just-released report citing “information from servicers” as well as data from First American Loan Performance, which finds that re-defaults, 60 days or more, on U.S. residential mortgage-backed securities (RMBS) may hit 75% after 12 months. Nonetheless, the rate of loan modification continues to increase with 7% of overall RMBS and 18% of subprime loans being redrafted through the end of last month. “Loan modifications hold clear value for many homeowners provided the modified payments are sustainable, but more often than not reducing the home payments to an affordable level may not be enough to rescue borrowers who are overextended on other credit and expenses,” says Fitch managing director Diane Pendley. “With continued home value declines in many  markets, there is  growing evidence that some homeowners are voluntarily walking away from their homes even if they can financially afford to stay.” The rating agency list six clear scenarios where re-defaults are likely to occur, including simple events, such as moving town for a new job and just leaving the property unoccupied to more shady instances where borrowers misrepresent owner-occuapncy status in onder to meet criteria for the Home Affordable Modification Program. Fitch is also predicting a decline in the number of homes in REO status through Q309. Write to Jacob Gaffney.