Loan Modification Failure Rate

I have spent the last several years preaching Short Sales and the importance of recognizing there significance in the market place. Now with the national changes in the political climate the 'Anti Foreclosure Parade' marches on. Here are some facts about Loan modification which I am anxious to stop writing about. It appears the HAMP program is about as significant as a Big Foot sighting!
In what it termed a "conservative projection," Fitch Ratings says 65% to 75% of securitized subprime loan modifications will fall back into default a year after modification.

The findings were included in Fitch's semiannual report on loss mitigation actions taken by servicers on securitized loans. The report, which included information from Fitch-rated servicers and data from First American Loan Performance, found that, during the first half of 2009, about 30% of modified subprime loans fell back into default by the six-month mark and about 60% redefaulted 12 months after modification.

These numbers actually understate the number of loans that fail after modification, Fitch says, because the figures do not include modified loans that were subsequently re-modified or liquidated. While the rating agency adds that the number of prime-loan modifications initiated this time last year is insufficient for Fitch to determine a 12-month trend, at six months, the statistics on prime redefaults are similar to those for subprime and Alt-A loans.

By analyzing a pool of loan modifications from the third quarter of 2008 - a pool that included prime loans but mostly comprised Alt-A and subprime loans - Fitch found that 34% of the loans are current today. Five percent are in 30-day buckets, 17% received a second modification and 8% have been liquidated. These statistics support Fitch's contention that its 65%-75% redefault projection is conservative.

In explaining why modifications may not necessarily be the best route for servicers to take with certain borrowers, Fitch warns its rated servicers against re-modifying loans for the sake of improving performance data.

"The use of multiple mods for the sole purpose of managing default statistics and advances could not only put at risk a servicer's, as well as the transaction's, ratings, but also could greatly increase the ultimate loss to the investor," the report's authors state.

Modifications as a percentage of loan resolutions (i.e., actions that result in home retention as well as those that result in foreclosure) grew in the first six months of the year when compared to the six months ending Dec. 31, 2008. Loan modifications accounted for 58.1% of residential mortgage-backed securities loan resolutions in the first half of 2009, whereas they made up only 39.6% of loan resolutions in the last half of 2008. In total, 88.5% of the loans worked by Fitch-rated servicers' loss mitigation departments between January and June 2009 resulted in workouts. For the prior six-month period, 71.4% of cases resulted in workouts.

Looking for a Loan Modification, good luck. All too many loan moods are in favor of the lender and not the consumer!

-Christopher Rockey