Excerpt from: Mortgage Perspectives
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| May 26, 2009 | | Re-default rates are far worse for loans that sit in default before attention is paid. Re-default also means higher propensity to foreclosure and everyone losing. Don't delay in addressing defaulted loans. | At the Distressed Asset Roundtable and Exchange in NY this month, Laurie Goodman, Senior Managing Director of Amherst Securities, presented an array of data in a panel on Loan Modifications: How Servicers can Bridge the Gap. The gap is described by the number of loans in default and the current capacity to offer and close (more on this later) modifications.
She showed one chart highlighting the value of making loan modifications early in delinquency versus letting weeks and months lapse before contacting the borrower:
As Ms. Goodman's data suggests, the longer one waits after default to put in a modification, the greater the rate of re-default. If your workload is such that it takes 4 months or more to apply a modification, your re-default rate is as high as 80%. If you get to the modification in one month, then the rate is significantly lower.
Delinquent loans cost more than current loans. Loans that re-default are more likely to end in foreclosure than those that don't. And, foreclosure is almost always the most expensive option for borrowers, servicers and investors. There is significant value to all players in closing loan modifications early in the default cycle.
We emphasize "closing" the modifications because there are a lot of claims from many quarters about high numbers of modifications being "made" recently. When borrower counseling groups quote modification numbers, they tend to be quoting modifications that have been presented to lenders and servicers as advisable and acceptable to the borrower. This is divorced from a servicer's contractual and legal obligations to the lenders and investors. Beyond that, the recommendations are based on stated borrower data about borrower income, credit, payment history and asset/property value.
The net result of these offerings is to accelerate the servicers' backlog of delinquent loans awaiting workout. Without a mechanism to evaluate and agree on modifications that make use of actual, independent data and that are reflective of all parties' obligations, the backlog will continue to grow and future re-default rates will continue to rise. For our part, we believe that given the volumes of workouts needed over the next few years, the only solution is technological, based on a deep ability to re-underwrite, or re-decision a loan.
It's never too late to be what you could have been.
-George Eliot
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