A Fitch Ratings' update of U.S. RMBS Servicers' Loss Mitigation and Modification Efforts report finds loan modifications are "on a steady decline" as only 36,500 modifications were completed in December 2010, raising concerns about how many distressed U.S. mortgage borrowers will get a final response and by when.
The rating agency reports that since "the high water mark of 86,500 modifications in April 2009," loan modifications have steadily decreased, making it more plausible to see more distressed borrowers eventually lose their homes and ultimately go into foreclosure.
Fitch analysts described the results of combined efforts of HAMP and other mortgage loan modification programs as making "little more than a dent" in the large volume of outstanding distressed loans.
Comparatively, as of December 2010, loss mitigation efforts such as short sales and deed in lieu have increased slightly with 53% of Prime, 34% of Alt-A and 32% of subprime liquidations being not by foreclosures or real estate owned property sales.
Thanks to these alternative liquidation methods, Fitch said, by yearend loss severities improved slightly when compared to REO sales. Which is why in 2011 Fitch expects the level of "alternative strategies" to increase despite their lack of popularity with homeowners.
According to Fitch alternative strategies would be the best strategy also because the agency continues to expect "a majority of modified mortgage loans" will re-default within a year.
Nonetheless, Fitch's 2011 re-default projections are "slightly lower" at 60%-70% for subprime and Alt-A loans and 50%-60% for prime loans in part because even though HAMP failed to meet "volume projections," it has succeeded in standardizing the reduction of payments thus allowing for "more attention on the use of modifications."
Mixed outcome from foreclosure prevention efforts and alternative strategies aside, the stalling effect of procedural defects in servicer foreclosure procedures in many states is expected to further lengthen "already-substantial" default processing timeframes and expectations of an inventory backlog clearance.
The agency's head of U.S. RMBS operational risk Diane Pendley said both current and expected inventory suggest, "it will take four years to remove the backlog of properties and return the market to balance."