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Fitch: High Rate of Unsuccessful Mods Threatens Asset Quality

Servicers continue to make strides in home retention efforts, completing more than 360,000 retention actions in the ""fourth quarter of 2012"":http://dsnews.comarticles/occ-mortgage-performance-improves-in-q4-as-delinquencies-foreclosure-decrease-2013-03-28, according to a report from ""Office of the Comptroller of the Currency"":http://www.occ.gov/ (OCC). However, ""Fitch Ratings"":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp detects continued ""weak asset quality trends,"" especially among loans modified from 2008 through 2010.


In fact, Fitch's findings lead the agency to fortify its belief that troubled debt restructurings should be counted as nonperforming assets.

""[W]e regard the high delinquency and foreclosure rates for recently modified mortgages as reflective of still elevated residential mortgage asset quality problems,"" Fitch ""said this week."":http://www.fitchratings.com/gws/en/fitchwire/fitchwirearticle/Modified-Mortgages-Still?pr_id=787215&cm_mmc=ExactTarget-_-Email-_-LM_FW_NA_NYC_2013Apr02-_-0000

Fitch admitted modification performance is showing improvement, but ""opaque and inconsistent disclosure practices"" prevent the agency from obtaining a clear picture of the number of successful loan modifications.


The OCC revealed in its ""_Mortgage Metrics Report_"":http://www.occ.gov/news-issuances/news-releases/2013/nr-occ-2013-56a.pdf for the fourth quarter of last year that a little less than half --47.7 percent--of the nearly 2.9 million loans modified since the start of 2008 are current or paid in full.

About 7.1 percent are currently less than 60 days delinquent; 14.2 percent are 60 or more days delinquent; 7.7 percent are in the foreclosure process. Lastly, 7.3 percent have already been foreclosed.

The OCC reports higher success rates among particular types of modifications. For example, the agency finds greater success among HAMP modifications. However, the OCC notes, ""more restrictive qualification criteria restrict the number of borrowers who may qualify for a HAMP modification.""

Additionally, modifications that result in at least a 10 percent reduction in monthly payments for borrowers perform better than those with lower payment reductions, according to the OCC.

As of the fourth quarter of last year, 54.8 percent of modifications with at least 10 percent payment reductions were current or paid in full, while 36.5 percent of those with lower reductions were performing or paid.

Fitch concedes there has been ""incremental progress"" in modification performance but maintains ""the overall picture points to a continuation of broadly weak asset performance in mortgage portfolios.""

Thus, continuing to include troubled debt restructurings in the nonperforming asset category as they are ""still weighing heavily"" on nonperforming asset ratios for large financial institutions.


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