Negative Equity not a Big Factor in Mortgage Re-defaults
CreditSights looks at US mortgage modification programs in an analysis carried out with ICP Advisory and Solutions.
Key findings:
- Only 230,000 government-approved modifications have so far been started, the program’s target is for three to four million modifications. At the same time data from HOPE Now suggests that loans are being modified in increasing numbers, but not necessarily in ways that meet the criteria of the Administration’s Making Home Affordable Program.
- In Subprime, re-delinquency rates are almost 40% and even in prime and non-negatively-amortizing Alt-A they are 30%. It is possible, however, that the mortgages that tend to relapse are those that do not follow the Administration’s guidelines.
- The analysis suggests that relieving payment stress is far more effective at reducing re-delinquency risk than resolving negative equity. Indeed, it is possible that forbearing repayment of principal and accrued interest until maturity could reduce defaults.
- However, such a delayed repayment schedule will likely see junior RMBS benefit at the expense of senior notes. Subordinated bonds may continue to receive coupon payments thanks to more mortgage borrowers being able to make their payments. At the same time, senior noteholders will need to wait longer to receive their principal back and are still at risk of losses if the borrowers default.
…while negative equity may not be sufficient to encourage large numbers of comfortably-off borrowers to default, the prospect of being able to negotiate much better terms might.
For details see RMBS: How Successful are Mods?
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