Moody’s Investor Service called for increased disclosure of both the type and volume of U.K. loan modifications and arrears capitalization.
In a report released today, the rating firm also asked for information on the performance of the loans after the modification.
According to Moody's, without the proper vigilance, loan modifications may simply delay or possibly worsen borrowers’ problems.
This is of similar sentiment to the proposed guidance issued by the Financial Services Authority (FSA) on May 3, which warned about the potential effects of the modifications on borrowers.
Moody’s estimated that between 30% to 50% of modified loans return to arrears afterwards. This means that a considerable amount of borrowers were unable to service their modified loans on a continuing basis. This is possibly a reflection of the lenders' inability to properly assess the full extent of the borrowers’ financial situation.
Overall, about 20% of loans in arrears are modified somehow, ranging from the extension of the maturity of the mortgage to the conversion of the mortgage to interest-only. Increased information could help provide more insight into this relationship.
Enhanced transparency, along with improved loan modifications methods could help benefit the overall performance of the RMBS market, the Moody's report stated. These practices include early repossession of delinquent mortgages by the lender and interest-only loans or arrears capitalization.