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Subprime mortgage performance appears to have turned a corner, thanks to an increase in loan modifications made under the administration's Home Affordable Modification Program (HAMP), according to ""Moody's Investors Service"":http://www.moodys.com.
[IMAGE]New originations of subprime loans are all but obsolete now that lenders have abandoned the loan products blamed for fueling the nation's housing crisis. But during the years running up to the bursting of the bubble, they were handed out in abundance, and as lenders chased after more capital to meet rising market demand, the body of the industry's subprimes were sold off as residential mortgage-backed securities (RMBS).
The proliferation of the secondary markets during the subprime boom has left investors holding the bag on these high-risk loans, but Moody's says the new trend it's observed in loan performance is a ""credit positive development for subprime RMBS,"" with HAMP being a large contributor to the improvement.
After rising steadily for nearly four years, Moody's says the total delinquency rate among 2005-2008 vintage subprime RMBS peaked at 54.4 percent in January 2010. Over the next three months, the delinquency rate began to decline and as of April, rests at 51.5 percent.
""These improvements come as increasing percentages of delinquent borrowers have become current on their loans as a result of federal loan modification efforts through
[COLUMN_BREAK]HAMP,"" said Peter McNally, a VP and senior analyst for Moody's, said in commentary released to DSNews.com.
As HAMP ramped up in 2009, McNally explained that the number of seriously delinquent loans increased because loans that would otherwise have been foreclosed on and liquidated, instead waited for their placement into trial modifications.
Over the past few months, though, the number of active permanent modifications has more than doubled, increasing to 299,092 in April from 117,302 in January, and McNally says each permanently modified loan improves the aggregate delinquency rate because at that point, the loan's status changes from delinquent to current.
Moody's notes that the last few months have been characterized by increasing cure rates. About 24% of borrowers that were 30 days delinquent in February were current in March, according to the ratings agency. By comparison, over most of 2009, only roughly 15 percent of such borrowers in a given month became current on their loans by the following month. At the same time, Moody's says instances of new delinquencies have decreased.
In the midst of what is undoubtedly good news for investors in subprime securities, McNally warned that re-defaults could burgeon unless more servicers begin employing principal forgiveness.
""We currently expect that 50 percent to 70 percent of permanent modifications will eventually re-default,"" he said. ""Because negative equity is such a significant driver of loan defaults, the ultimate level of re-defaults will depend heavily on the successful implementation of principal forgiveness.""
McNally says Treasury's recently announced enhancements to HAMP, which focus on principal forgiveness to help homeowners with underwater mortgages, will lead to an increase in the trial-to-permanent conversion rate, and is key to future improvements in subprime RMBS performance.
