Interest Rate Roundup

Friday, September 21, 2007

So where are all those "Mod Squads?"

A few months back, Bear Stearns highlighted the existence of a "Mod Squad" at its EMC Mortgage division, which services subprime home loans. The idea was that this Mod Squad would proactively contact borrowers in an attempt to head off foreclosures by modifying their loan terms.

I'm not sure how well that effort is going at EMC. But a new report from Moody's Investors Service suggests the industry as a whole is doing a pretty poor job getting out in front of the problem and modifying loans. Moody's just put out a note saying it surveyed 16 subprime loan servicers that handle a total of $950 billion mortgages. It wanted to find out what they were doing for borrowers who either already experienced an interest rate reset in 2007 or who will face one later this year or sometime in 2008.

The answer? Not much. Per Moody's: "The survey showed that most servicers had only modified approximately 1% of their serviced loans that experienced a reset in the months of January, April and July 2007." Moody's also noted that some servicers were actually calling borrowers who faced resets, but most were still just sending them letters - a more passive approach.

How big of an impact are resets having on loan performance? And how many loans are facing resets? Glad you asked. Moody's says (emphasis mine) ...

"Some servicers reported that they could experience in a given quarter interest rate resets
on loans which constitute up to 15% of their portfolio during the period from late 2007 to early 2008. In addition, data from a limited subset of servicers indicated that for loans that were current prior to reset and were not modified, the average delinquency rate after reset was in the 5% to 15% range. However, these results are for loans that were made in early 2005. Those loans were of generally higher quality than loans that were issued later in 2005 and in 2006 and had greater refinancing opportunities as they were not as impacted by the negative home price environment. Moody's expects delinquencies will be higher for subprime loans backing securitizations issued in late 2005 and in 2006 and that reset without modification."

Lots of potential solutions to the mortgage mess are being discussed right now. Fannie Mae and Freddie Mac will likely be allowed to expand their loan portfolios. The FHA mortgage program is going to be modified so more troubled borrowers can refi into a government-backed loan. And Congress may raise the conforming loan limit so mortgages that are currently considered "jumbos" could be purchased by Fannie Mae and Freddie Mac (something that would lower the rates on those loans).

But when it comes down to it, loan modifications are supposed to be one of the best solutions. That makes this report from Moody's troubling to say the least.


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