Steep Re-Default Rates on HAMP Modifications are Predicted

The government’s Home Affordable Modification Program (HAMP) has been panned by critics for what many say are substandard results, and a new report from Fitch Ratings indicates that even the small successes it’s made so far may soon be reversed.

The company says that within 12 months, 55% to 65% of the prime loans modified under the federal program will likely re-default. For modifications on subprime and Alt-A loans, the projection is higher – 65% to 75%.

The agency’s analyst stated in their report:
“Fitch continues to believe that, when properly done, modifications can benefit both homeowners and [residential mortgage] investors. However, modification performance or sustainability continues to be affected by the borrowers’ desire to keep their property, as well as having sufficient cash flow to make the modified payments.”

The ratings agency says it is encouraged by the prospects of the administration’s newest initiative, the principal write-down modification approach, since it attempts to address the borrower’s desire to stay in the home.

However, Fitch’s analysts note that the program, which isn’t expected to be ready for implementation until later this year, limits the principal write-down to no less than 115% of current value and also requires the borrower to perform under the terms of the modification for three years to receive the full benefit of the write-down.

According to Fitch’s report, approximately 15% of all non-GSE loans held in residential mortgage-backed securities (RMBS) by balance had received at least one modification as of May 2010, including almost 35% of RMBS subprime loans.

But even modified loans prove to need more restructuring, Fitch says. Its study shows that 15% of all modified mortgages in non-GSE securities have received at least one additional modification.

While modifications continue to be the primary strategy to work out problem loans, accounting for just under 70% of all loan workouts, the use of alternative methods to foreclosure, such as short sales and short payoffs, has increased materially since mid 2009, Fitch said.

Currently, 50% of prime and 35% of subprime and Alt-A distressed liquidation sales are not by REO sale, the ratings agency reports.

Of these loans liquidated by a short sale or payoff, Fitch found that 8% were located in 8% in Florida.

Fitch concludes:
“It is expected that, following guidelines from the Obama administration, the percentage of loans liquidated outside of REO sale will continue to increase.”