CRL's news comes on the heels of last week's first quarter 2009 National Delinquency Survey by the Mortgage Bankers Association, showing that 12 percent of all mortgages are now delinquent – the highest level since the industry trade group began compiling delinquency numbers 37 years ago.
Michael Calhoun, president of CRL, called the rapid escalation in foreclosures alarming. "It's easy to think, 'Well, that's tough luck for the families that lose their homes.',” Calhoun said, but he cautioned, “The truth is that foreclosures are costing neighboring families hundreds of billions of dollars and dragging down the entire economy. Foreclosures started today's crisis, and foreclosures will keep the crisis going if this epidemic continues."
The Center for Responsible Lending projects 2.4 million foreclosure starts in 2009. The organization warns that these foreclosures will reduce the property values of some 70 million nearby homes by a total of $502 billion – about $7,200 per family. Through 2012, CRL said, these numbers will rise to at least 9 million foreclosures that will cost 92 million neighboring families $1.9 trillion in lost home value.
The center points out that the industry's track record proves loan modifications that fail to lower a homeowner's monthly payments are not likely to succeed. The Obama administration's foreclosure relief plan, however, includes stronger incentives for servicers to pursue more sustainable loan repairs. And CRL says these new guidelines encourage earlier intervention and loan modifications more likely to reduce monthly payments -- tools designed to stabilize the housing market and keep people in their homes.
CRL points out though, that while the industry waits for the next wave of mortgage modification programs to be put into place, a new foreclosure starts every 13 seconds – tallying nearly 6,500 each day. The organization has sent out an urgent call to lenders and loan servicers, “to work with homeowners in good faith to dramatically increase loan modifications that actually stop foreclosures and keep people in their homes.”
Fitch Expects Re-Defaults on 75 Percent of Subprime RMBS Mods
Carrie Bay | 06.01.09
Fitch Ratings took a closer look at servicers' loss mitigation efforts among residential mortgage-backed securities (RMBS) in a special report issued last week. The agency found that while home loan workouts to avoid foreclosures have increased substantially, re-defaults post-modification continue to be a problem for servicers, investors, and homeowners, with as many as three-fourths of those mortgages in the subprime category projected to fall back into default status within one year of the initial resolution.
The report examined mortgages bundled into securities between 2005 and 2007 – a period marking the peak of subprime lending and investor involvement in the secondary housing market. The loan pools are serviced by more than 30 Fitch-rated firms who collect and modify the loans for RMBS investors.
At the end of 2008, Fitch projected that over the following 12 months, RMBS servicers would modify up to 15 percent of 2005−2007 vintage RMBS mortgages, an increase from virtually none in 2007. As of April 2009, the agency reported, approximately 7 percent of RMBS and 18 percent of RMBS subprime loans securitized during this period had been modified.
According to Fitch, 35 to 55 percent of RMBS modifications typically re-default after a year. However, based on information from servicers and data from First American Loan Performance, Fitch places a “conservative projection” for subprime re-default rates within the range of 65 to 75 percent after 12 months. The agency says market pressures on servicers to pursue more aggressive mods and sliding home prices, as well as continued job losses across the country, factor into this heightened subprime projection.
Principal reduction has been debated as necessary for the success of modifications. Proponents believe that borrowers re-default less when they have greater incentive to stay in the home by having their principal reduced, giving them an immediate, or at least a faster, means of accumulating equity. Fitch's data on mods supports this theory. The agency says loan modifications with material principal increases of more than 10 percent show higher re-defaults – 60 to 70 percent.
Fitch points out in its report that the new administration’s modification guidelines primarily focus on affordability of payment, with the use of principal forbearance (as opposed to forgiveness) as a last step in the process. However, the program provides for incentives ($1,000 for each of five years) to reduce the outstanding principal if the borrower successfully keeps up with the new mortgage payments.
For those servicers who have signed on to the federal Home Affordable Modification program, the program guidelines state that the administration's modification procedures should be used as “usual and customary industry standards,” including application to RMBS. And if such modifications are specifically prohibited by securities' pooling and servicing agreements (PSAs), the servicer is required to use reasonable efforts to remove these obstacles. However, Fitch says many RMBS investors, as well as servicers, have expressed concerns with the administration's guidance regarding long-term performance of the modified loans, process specifics, and legality within the PSA contracts.
