Two new reports have cast doubts on the long-term effectiveness of loan modification programs.
In ‘Loan Modifications Can Provide A Short-Term Cure, But Few Achieve Permanent Success,’ Standard & Poor's (S&P) used loan-level non-agency residential mortgage-backed securities (RMBS) data available through CoreLogic to analyze first-lien loans issued between 2000 and 2007 that were modified between 2007 and 2010. S&P found that over 1 million non-agency loans were modified between 2007 and 2010, and approximately 19% of these loans currently outstanding have received at least one modification. In the first 12 months after a modification cured a loan that was seriously delinquent (i.e., 60 or more days past due), borrowers made an average of 7.8 additional payments.
S&P determined that although loan modifications can provide additional loan payments for investors – as well as a reprieve to borrowers from foreclosure proceedings – those benefits were usually short-lived.
‘At 24 months following modification, the payment statuses of modified loans showed no significant improvement compared with the month before they were modified,’ says Diane Westerback, managing director. ‘Similarly, 80 percent of loans that a modification cured defaulted again within 24 months.’
Separately, according to new data issued by Fitch Ratings, 36,500 mortgages received modifications through government and private-sector servicing programs in December 2010. This represents a 57% drop from the April 2009 peak of 86,500 loans. Fitch found that other loss mitigation efforts – including short sales and deed-in-lieu offers – have increased slightly: As of December 2010, 53% of prime, 34% of Alt-A and 32% of subprime liquidations were not by real estate owned sale.
However, Fitch warned that between 50% and 60% of prime loans and between 60% and 70% of subprime and Alt-A loans that received loan modifications are expected to experience another round of default within a year.
"The combined efforts of HAMP and other mortgage loan modification programs have made little more than a dent in the large volume of outstanding distressed loans," says Managing Director Diane Pendley. ‘Based on current and expected inventory, it will take four years to remove the backlog of properties and return the market to balance.’