The mortgage modification landscape is fundamentally changing thanks to the housing recovery.
For the next 12 months, mortgage modification activity will continue to decline as both payment relief and principal reductions reverse the four-year trends of increases, according to Amherst Securities Group latest report. And this is good news.
"Moreover, despite the drop in payment relief and in principal modifications, we expect modification success to continue to rise," write Amherst analysts.
During the past two years, modification activity actually declined substantially, with further declines expected.
The number of modifications actually peaked in 2010, as the Home Affordable Modification Program gained a foothold and servicers ramped up their systems to turn temporary mods into permanent ones.
"One of the hallmarks of the HAMP program was the inclusion of the 3-month trial period, which many servicers were not doing prior to the 2009 introduction of HAMP. This 3-month trial became a part of the blueprint," analysts explained.
As a result, 2010 modifications reflected not only 2010 activity, but also some additional modifications initiated in 2009.
The number of modifications will drop 35% in the next 12 months, and 47% over the next 24 months, according to Amherst Securities.
If further improvements in home price appreciation are taken into account and assume the roll rates from current to delinquent drop by 25% instantaneously, then modification activity would decline 56% over the next 24 months, versus 47% with constant roll rates, the analysts noted.
Over the past four years, the modification landscape has shifted, particularly there has been much greater emphasis on borrower-friendly modifications — including mods which represent more of a payment reduction for the borrower, as well as those with more principal forgiveness.
Note that the reduction in pay relief occurred across all modification types and while the decline has been small so far, it will continue to slide as mods must pass the net present value test — the present value of the modification must be higher than the value of the home if sold as real-estate owned properties.
"As home prices rise and the foreclosure discount narrows, the present value of the recovery value (if the home was sold as REO) should increase. Thus, in many cases, the pay relief must be lower to pass the NPV test for a modification," Amherst Securities analysts stated.
Thus, the share of principal modifications will continue to drop as home prices increase.
Meanwhile, modification success will continue to improve despite less pay relief.
In general, modification success has improved significantly and these improvements have been occurring in an environment that has had both positive and negative factors.
"On the positive side, there has been more significant payment relief over time (with a small decline the past few months), significant declines in the interest rates offered on modified loans, more principal reduction (again, with a small decline the past few months)," according to Amherst Securities analysts.
They added, "On the negative side, borrowers are more delinquent at the time of modification, and second and subsequent modifications as a percent of total modifications has been growing."
Overall, modification success will continue to improve due to home price appreciation, despite less significant modification payment relief, the analysts concluded.