Tuesday, December 16, 2008

Loan Modification Push Will Affect Securitized Mortgages: Fitch

From the Housing Wire:

Loan modifications will grow to 15 percent of 2005-2007 vintage securitized mortgages over the next twelve months from virtually none, according to a report released Tuesday morning by analysts at Fitch Ratings. The agency said it has received a number of inquiries on proposed changes to transaction documents that expand the servicer’s ability to do modifications, a sea-change in how investors are looking to manage mortgage-related investments.

To date, as most HousingWire readers likely know well, while a slew of moratoriums and modification programs have been announced in recent weeks, few actually apply to investor-owned and securitized mortgages; nearly all efforts thus far have only applied to mortgages owned by the bank and sitting on its balance sheet.

That’s not to say servicers of securitized loans aren’t modifying loans; Ocwen Financial Corp. (
OCN: 8.09 +0.87%) is one firms that we’ve covered extensively here at HW that has been doing so in earnest since roughly April of this year.

Recent data from the Federal Deposit Insurance Corp. and the Office of Thrift Supervision indicates that the 14 largest banks and thrifts modified 187,000 mortgages in the first half of 2008. “There will be increases in securitized loan modifications if only to ensure that borrowers in a securitized pool are being treated equally to borrowers whose mortgages are held by a bank, as well as to fulfill the servicers’ duties to maximize returns to the trust,” said U.S. RMBS group head Huxley Somerville.

Obviously, the recent rash of announced moratoriums — JP Morgan Chase & Co. (
JPM: 29.948 +4.60%) and Citigroup, Inc. (C: 7.77 +5.00%) among them — are designed to help banks find a solution other than foreclosure for troubled borrowers. Somerville noted that in the short term, the moratoriums may at best provide additional time for outreach efforts; it’s common knowledge in the servicing space, after all, that roughly 50 percent of delinquent and foreclosed borrowers never once speak with their servicer.

But they may not do much more than that. “Foreclosure moratoriums in and of themselves will not resolve the problems facing lenders and borrowers and the critical next step is the design of loan modifications,” Fitch suggested. A separate report from Fitch
suggested Monday that problems in Alt-A space are continuing to mount, despite relatively small increases to date in cumulative loss totals.

Generally, the original documentation governing securitized transactions are either silent on distressed loan modifications — as we’ve seen in a
recent high-profile case involving Countrywide — or restrict the number or type of modifications allowed (generally to 5 percent of a given pool).

In the current high delinquency environment, Fitch said that changes to existing pooling and servicing agreements are being sought for deals that have modification limitations; obviously, the issue is a bit more complicated for deals who PSAs were more vague around the issue.

One way to change the documents is for rating agencies to confirm the current ratings with the contemplated document change, which Fitch said it has already been asked to do in several instances. The changes to the documents being considered allow the servicer a greatly expanded authority to modify a greater number of loans than currently exists; the agency said it will publish a report detailing the different types of loan modification options being considered in the coming weeks.

“Modifications, when properly done, can benefit both U.S. homeowners and RMBS investors,” said Somerville.

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