Re-Defaults on U.S. RMBS Will Stay High, Fitch Says

Fitch Ratings expects a significant number of Home Affordable Modification Program (HAMP) and servicer-specific modified loans to default within the next year, the credit rating agency announced in a report today.

While the firm cited a rise in modifications since HAMP’s launch early last year, with 15% of all RMBS loans receiving a HAMP or non-HAMP loan modification through May 2010, the program has fallen short of its modification goals to date. Changes to HAMP imposed by the U.S. Treasury may continue to impede the program’s progress, according to managing director Diane Pendley.

"With servicers now required by HAMP to re-analyze and re-work borrowers, final determination of the program's ultimate effectiveness will continue to be delayed," Pendley said.

In light of these figures, Fitch maintained its projection that 65%-75% of modified subprime and Alt-A loans will default within the next twelve months. The agency released a lower figure for prime loans, anticipating a default rate of 55%-65%.

Fitch expects the increase in short sales, half of which occurred in California since the middle of last year, to help the loan resolution landscape over time. Although the firm cited advantages to both borrowers and investors, the strategy may result in borrowers losing their homes, as assets in short sale compete with other distressed properties, according to Pendley.

“Many distressed mortgage loans, including modified loans, will not see a final resolution until well into 2012,” Pendley said. Continued changes in guidelines and programs, potential new moratoriums, and mandated mediations, according to Fitch, will add to the delay.