This week’s Amherst Mortgage Insight argued that loan modifications are as important as bulk sales in solving the housing crisis.

"We've long maintained that bulk sales of Real Estate Owned (REO) properties to investors are one effective way to absorb the excess supply," Amherst Securities Group (ASG) analysts wrote.

However, analysts said that the bigger buyers are not participating in the market, despite the smaller investors taking part, because they find it hard to buy up sizable blocks of distressed properties.These larger buyers would need a "critical mass" of properties in a given location to build out and support a property organization, including rental agents and property managers, among others.

Because of this, relying on bulk sales is not enough to solve the housing crisis. "We also need more successful modification activity to keep borrowers in their homes," they wrote.

in this vein, analysts suggested ways of improving the modification process in the private-label RMBS market.

They said that modifications initiated earlier in the delinquency process are likely to be more effective and helps in determining key borrower characteristics that lead to a mod's success. Although it was at first very difficult for servicers to modify borrowers early, ASG said that servicers should actually target borrowers as early as when they miss one or two payments. Even at this stage, analysts said servicers should assess them promptly and offer a modification if needed.  

In addition, the report explained that principal modifications are a very effective tool. The problem is that the largest servicers have only performed this type of modification on 16.4% of the loans in private-label securities, although the use of this type has grown dramatically and ASG analysts expect it to continue increasing.

Another significant driver of modification success is pay relief. Analysts stated that lower FICO borrowers generally have the best results in modification. Data showed that for 2011 modifications, borrowers with more than 20% pay relief had a 12-month re-default rate of 30%, whereas those with less than 60% pay relief had a re-default rate of 12%.

ASG analysts also said that second modifications are commonly less successful than the first. "Do it right the first time," they said.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.