Servicers of subprime residential ARM loans have increased their efforts to modify these types of troubled mortgages, according to today’s Moody’s Investors Service report.

The modifications could modestly lower cumulative losses on loan pools backing some mortgage securitizations, although the survey also shows that 40% of the loans modified in the first half of 2007 were at least 90 days delinquent as of March 31, 2008, reflecting principal deferment and arrearage capitalization on seriously delinquent loans.

Recent modifications on subprime ARM loans, however, have shifted focus to interest rate reductions, and about half of these more recently modified loans have been less than 60 days delinquent at the time of modification. Moody's believes these factors could possibly lower re-default rates.

In the survey, Moody's found servicers had modified, as of the end of March 2008, 9.8% of the subprime ARMs with interest rate resets in the preceding 15 months. In December, a similar survey found only 3.5% of resetting loans being modified.

In addition, the percentage of delinquent loans that were either modified or on workout plans had increased to 35% as of March 31, up from 24% in December.

Moody's Managing Director Warren Kornfeld said the rate increase results from factors including increased outreach to borrowers on the part of servicers and non-profit third parties, increased attention from legislative bodies, the media and advocacy groups, and industry-wide attempts to streamline the modification process.

The report said the recent Mortgage Forgiveness Debt Relief Act, which provides tax relief on forgiven debt for borrowers, could further increase the level of future modifications, while pending legislation such as the American Housing Rescue and Foreclosure Prevention Act might decrease the need for modifications. These measures would assist borrowers in refinancing into more affordable mortgages in conjunction with current mortgage holders forgiving a portion of the outstanding loan.

The loan modification survey is Moody’s third of this kind and includes information from ten servicers, which constitute about half of the total subprime servicing market.

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