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Loan Modifications Lead to Fewer Mortgage Insurance Claims: Report

Mortgage insurance claims filed by servicers on defaulted loans are showing signs of tapering off, according to data released by the risk analysis and due diligence firm ""Clayton Holdings"":http://www.clayton.com.

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Clayton's analysts attribute the decline to the increase in servicers' foreclosure prevention initiatives and fewer loans moving into REO status.

The company also noted that the time from claim filing to payment has increased by over 50 days in the last quarter of 2009. Clayton says these delays are because mortgage insurance providers are spending more time reviewing individual claims and evaluating servicers' modification decisions for continued insurance coverage.

Another contributing factor could also be an extended time for servicers to file claims. Clayton found that one of the major insurers is now allowing servicers one year to perfect a claim which traditionally is 60 days after transfer of title.

Clayton pointed out in its report that as modification volumes have increased so has the concern regarding how those restructurings will affect potential mortgage insurance payouts. But given that the volume of modifications didn’t ramp up until the second half of 2009, the number of liquidated loans that were previously modified is low. To date, Clayton has only seen a relatively small number of claims filed specific to modified loans with only a few denials of coverage. The firm says the denials were a result of modification documentation not sent to the mortgage insurance company.

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Based on Clayton’s research of the major mortgage insurers’ stated guidelines, claims can be paid out on modified loans. The company explained that typically servicers must seek loan-level approval on proposed modifications, but if the modification is approved by the insurer, the investor is covered in the event of a post-modification liquidation.

In these circumstances, Clayton noted in its report, given that the modification cannot be completed until the insurer has approved the terms of the modification, a delay may occur in the servicer’s modification processes.

To circumvent this delay, Clayton found that several mortgage insurers have delegated authority agreements with the servicers. These agreements allow the servicer to modify a loan without prior consent from the insurer, as long as the modification falls within that insurer’s guidelines. Clayton said, from information provided on the Web sites of the major insurers, claims will be accepted on loans modified under the guidelines of the government’s Home Affordable Modification Program.

Principal reduction has become a hot topic of late. Clayton highlighted in its report that for modifications with principal forgiveness the mortgage insurance companies will pay out on the modified balance. So in practice the loss incurred at the time of the writedown is no longer covered by the mortgage insurance, Clayton explained. This is an important factor that should be considered by the servicers when forgiving debt with mortgage insurance, the company's analysts noted.

“The current market environment necessitates an increasingly acute, and sometimes prescient, awareness of MI [mortgage insurance] providers’ actions on the part of the servicer,” Clayton’s analysts said. “The type of modifications servicers employ as well as the content and timing of communication to insurers will play critical roles in ensuring investors realize the full and expected benefit of mortgage insurance.”

Clayton says the industry should expect some level of delayed claim processing as servicers and mortgage insurers work to define submission and settlement processes with consideration to modifications.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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