Although both government and servicer-specific loan modifications continue to increase, a sizable amount of those loans will default again within a year, according to a Fitch Ratings report.
The comments seem to reinforce criticism that the government's Home Affordable Modification Program, or HAMP, would only result in delaying the inevitable foreclosure filing for those who can't afford to remain in homes due to a number of factors — including loss of income, a high level of household debt and reduced property values. HAMP is a government plan that pays mortgage-servicing firms to modify mortgages and find other ways to keep people in their homes.
Since HAMP was launched early last year, servicers have been making slow but steady progress with modifications under the program. By balance, about 15% of all residential mortgage-backed securities loans have received some sort of modification through May, up from 10% last September.
However, the results are falling far short of HAMP's completed modification goal thus far, noted Fitch. Managing director Diane Pendley added Treasury Department-imposed changes to HAMP will continue to impact future progress.
As a result, Fitch maintains that 65% to 75% of subprime and Alt-A loans that have been modified will default again within a year, a sign the government's efforts are mostly unsuccessful. Subprime loans have had by far the highest rates of borrowers in arrears, while Alt-A loans are those considered between prime and subprime and generally were given to borrowers during the boom who didn't document income and/or assets.
For prime loans, the default-rate projection is slightly lower, at 55% to 65%.
What could help the loan resolution landscape, according to Fitch, are short sales, which have increased gradually since the middle of last year, half in hard-hit California. Fitch said that strategy, which entails selling a property for less than the outstanding mortgage, has benefits for both borrowers and the investors, although it still results in a borrower losing their home.
With potential for new moratoriums and mandated mediations becoming more widely required, Fitch said it doesn't see a final resolution to many distressed mortgage loans until well into 2012.