Obtaining a loan modification is no indication that a borrower has successfully moved into a territory where they are safe from the threat of foreclosure.
In fact, a research note from Barclays Securitised Products Research team says most loans that end up going through a re-modification do so 30 months after a previous modification.
And standalone servicers, such as Ocwen (OCN) and Nationstar (NSM), have a reputation for maintaining two-times the share of re-modifications when compared to large banking servicers such as Chase and Wells.
With Ocwen and Nationstar gobbling up so many loans for servicing, this trend could continue, Barclays suggests.
“As bank loans get transferred to Ocwen and Nationstar servicing, the rate of remods will likely go up,” the research report said.
About three-quarters of re-modifications occur at least 18 months after the first loan modification, Barclays added.
Loans that are repeatedly modified generally perform worse than first-time modifications, the report says.
“This is an indication that remodification is a negative signal on the borrower’s equity and/or ability to pay,” Barclays said. “This difference could also be a result of the fact that servicers (such as Ocwen) that are less selective in offering mods and have worse redefault rates are also the ones that are remodifying the most loans.”
Prime loan remods perform better than subprime, Barclays said.
“However, we expect the differences to shrink as some prime/alt-A servicing transfers over to Ocwen/Nationstar and remodifications become less selective in the prime/alt-A sectors,” Barclays added. “Also, as servicers have to deal with a smaller pipeline of delinquent loans, we expect them to become more responsive and likely remodify loans much sooner in the redefault pipeline.”
Over the long-term Barclays believes the higher share of remods will create longer cash flows, especially when the deals are part of recently announced servicing transfers.
