Thursday, August 30, 2007

Loan Modification Data

by Tanta on 8/30/2007 11:48:00 AM

Credit Suisse's report on the August remittance data for the ABX basket of mortgage securities (no publically available link) includes information, for the first time as far as I know, about loan modifications.

Of the 80 deals surveyed, only 42 include modification information in the remittance reports. That does not necessarily mean there were no mods in the 38 deals; it just means their deal documents do not require that this information be included in the remittance reports. That may change, as more and more servicers are providing this information voluntarily.

For the 42 deals reporting modification activity, 47 loans from 10 different deals were modified. One deal, GSA06HE3, accounted for 21 of the total 47. Of those 21, 20 involved a rate reduction and 11 involved capitalization of principal and interest (past due payments). The average rate reduction was 2.20%. (I note that 2/28 ARMs increase at least 2.00% at their first adjustment.) CS notes that 5 of these loans actually ended up with an increase in the monthly payment (because capitalization offset the rate reduction).

The remaining 9 deals reporting mods involved 4 reporting 1 mod, 1 reporting 2, 2 reporting 3, 1 reporting 5, and 1 reporting 9.

CS does not speculate on why the Goldman deal reports so many more mods than the others. I, on the other hand, speculate that it has to do with the clarity on the subject provided in the prospectus for that deal:

Each servicer will be required to act with respect to mortgage loans serviced by it that are in default, or as to which default is reasonably foreseeable, in accordance with procedures set forth in the applicable servicing agreement. These procedures may, among other things, result in (i) foreclosing on the mortgage loan, (ii) accepting the deed to the related mortgaged property in lieu of foreclosure, (iii) granting the mortgagor under the mortgage loan a modification or forbearance, which may consist of waiving, modifying or varying any term of such mortgage loan (including modifications that would change the mortgage interest rate, forgive the payment of principal or interest, or extend the final maturity date of such mortgage loan) or (iv)accepting payment from the borrower of an amount less than the principal balance of the mortgage loan in final satisfaction of the mortgage loan. These procedures are intended to maximize recoveries on a net present value basis on these mortgage loans.
The claim has been bandied about lately that the servicing agreements for these deals just don't permit mods. That is clearly false as a generalization. Some obviously do. I see nothing in this prospectus that limits workouts (any of them listed here) to some stated percent of the deal balance.

However, it is clear that some deals do have language that restricts modifications, or at least is sufficiently ambiguous that servicers are unable to process with them without investor approval of the workout. Therefore, I for one proceed with great caution in looking at reported numbers on modifications for any sort of "trend" or reflection of the broader market of RMBS outside of the ABX buckets. It is likely to be a matter of "those who can, do, and those who can't, don't," and no one to my knowledge has attempted yet to quantify precisely how many can and how many can't. Given that just over half of the ABX deals report on modifications, I'd think it reasonable to speculate that at least half do allow mods, but that is speculation in the absence of digging through all those prospectuses, and I don't actually care about all of this that much.