Wednesday, September 26, 2007

Modification Update

by Tanta on 9/26/2007 11:19:00 AM

Many of our commenters have expressed concern over the possibility that servicers offering workout modifications will lead to "freeloading" by borrowers who could make their payment, but who wish to tell the servicer a sob story and get a rate break. I thought you might find the following from American Banker (subscription only) interesting:

In an interview this month, J.K. Huey, the senior vice president of home loan servicing at IndyMac Bancorp Inc., said that more than half of the borrowers who call the company for a workout or a loan modification do not qualify.

"We want to help people stay in their home provided they have the financial ability to do so," she said. "But we have to make sure they're going to be successful and the loan is going to perform. We can't do a modification just for the sake of it."

Of those whose requests for relief are rejected, roughly 60% did not respond to written requests for financial information, such as the borrower's last two pay stubs, a W-2 form or the last income tax return. "A lot of people do not want to send the financial information needed to prove what their income is," Ms. Huey said. "They really don't want to take the time to work with us."

The other 40% of loans that are denied loss mitigation are to borrowers who are current on their mortgage payments but who contacted IndyMac in an effort to get a lower rate, she said.

"We do have some customers calling us that shouldn't be calling us," Ms. Huey said. After reviewing those customers' finances, "we say that they have a $4,000 surplus and are able to make their payments, and they say they just wanted to check."
The gist of the article is that modification rates are still very low relative to the number of troubled borrowers; Moodys estimates that about 1.00% of 2005-vintage ARMs have been modified this year.

For those interested in data sources, the article quotes a spokesman for First American Title indicating that requests for modification-related title updates are up about 40%. (A modification does not require a new title insurance policy, as a refinance does, but it does need a "date-down" endorsement to bring the mortgage date down to the modification date, which is much cheaper than a new refi policy.) So title update volume might be a useful proxy for modification activity outside the securitized sector (which a source like the investment banks or rating agencies will limit themselves to).