WASHINGTON–A new study indicates that mortgage modifications may be likelier to succeed when the servicer holds the loan on its books. Not surprisingly, the report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision also found high failure rates for modifications across the board.
The report went further by breaking down redefault rates by investor type. Loans in private securitization pools fared the worst–in 42% of such loans that were modified in the first quarter, the borrower had fallen behind again after three months, and in 60.8%, the borrower had done so after six months.
For institutions that held the loans they serviced, 35% of the loans redefaulted after three months, and 50.9% did so after six months. The portfolios of Fannie Mae and Freddie Mac performed better than private pools and worse than servicer-held loans. “The lower redefault rate for loans held by servicers may suggest that there is greater flexibility to modify loans in more sustainable ways when loans are held on a servicer’s own books,” the report said.
Observers said different incentives for servicers that own the loans–giving them a clear economic stake in credit performance–and those that are handling loans for investors might play a role in the effectiveness of modification efforts.
“If you’re a captive of a bank where the bank has originated the loans and you’re servicing them, there certainly will be more suasion by the bank to modify these loans than a totally disinterested third party,” said Thomas Healy, a senior managing director with Insight Capital Partners LLC, a Fort Lauderdale, Fla., mortgage investment banking firm.
Susan Wachter, a professor at the University of Pennsylvania‘s Wharton School, said there is a “lack of incentive for servicers to optimally modify loans” that are sold to third parties. “They’re paid in full for foreclosure… They are also exposed to the risk that investors could sue.” One solution might be a law to relieve servicers of the threat of lawsuits from investors, she said.
