"Troubling to investors is that H4H locks in the existing investor's loss, without providing a mechanism for future recovery," says Moody's VP-Senior Credit Officer William Fricke. "H4H also does not address the administrative costs that servicers bear when they modify loans."
The FDIC's program, by contrast, does balance incentives for borrowers, servicers and investors, says Moody's. Borrowers receive affordable payments as loans are recalculated. Investors share losses with the government should a modified loan default. Loan servicers, in turn, receive a $1,000 stipend per modification to cover expenses.
Challenges for the program, however, remain.
"While the program addresses borrower affordability, it does not address the negative home equity that many borrowers are currently facing," explains Fricke. "Furthermore, the FDIC proposal requires an all-or-nothing participation on the part of servicers," adds Fricke.
The details of the programs are still evolving, which could change Moody's observations. As details develop and the utilization rate becomes clearer Moody's will review its loss expectations for the RMBS market.