Nearly Half of All Underwater Private-Label Mortgages Modified

March 20, 2013 No Comments »
Nearly Half of All Underwater Private-Label Mortgages Modified

For months, I’ve been banging on about the lack of a refinance program for private-label mortgages, those not backed by Fannie Mae and Freddie Mac.

Sure, HARP is great for underwater homeowners whose loans are owned by the pair, but what about those who aren’t so fortunate?

I’ve brought up proposals such as HARP 3 on several occasions, along with Oregon Senator Jeff Merkley’s refinance program that targets those who hold mortgages that aren’t government-backed.

The Obama administration has also been open to an expanded HARP for these types of borrowers, but without Congressional approval, any stirrings of such relief continue to fall on deaf ears.

But apparently these borrowers are actually receiving some assistance outside of HARP.

45% of Borrowers Have Received a Loan Modification

A new commentary released today by Fitch Ratings revealed that about 45% of all underwater borrowers with private-label mortgages have received a loan modification.

The company noted that loan modifications, distressed loan liquidations, and home price gains have reduced the number of underwater loans in private-label residential mortgage-backed securities (RMBS) by a sizable 25%.

There are still roughly 1.5 million underwater loans in these at-risk securities, though that number has fallen from 2.04 million.

Perhaps the biggest driver has been home price increases, with double-digit growth seen in some of the hardest-hit areas, including Arizona, California, and Nevada.

Assuming home prices continue to tick higher, which they’re expected to, the number of waterlogged loans will continue to drop at a steady clip.

While this is all good and well, the carnage is far from over. Fitch said about one-third of all outstanding borrowers in private-label RMBS pools (no pun intended) remain underwater.

It’s unclear how deeply underwater they are, but underwater nonetheless.

Additionally, the company projects some regions of the United States, notably the Northeast, to experience further home price declines before bottoming.

Why This Is Good and Bad

At first glance, it appears to be good news. Underwater borrowers with all types of loans are generally getting the help they need to continue making mortgage payments and hold on to their homes.

This benefits everyone involved because it makes for a stronger housing market. But the numbers can be deceiving.

Sure, 45% of these non-Fannie/Freddie underwater borrowers received loan mods, but what type of loan mod?

Did they get a $100 off their loan each month? Did they get a .125% interest rate reduction? Was principal forgiveness involved?

We don’t know what level of assistance they received, and if history tells us anything, a lot of these private loan mods weren’t all that attractive, at least not compared to HARP.

Through HARP, borrowers have been able to refinance their mortgages to interest rates a few percentage points lower than their previous rate.

That’s serious assistance, enough to stick around and see this crisis out. The private mods are another question.

This improvement also doesn’t bode well for an expanded HARP for non-Fannie/Freddie borrowers. The more improvement we see and hear about, the less likely Congress will be to act.

So the prospects of a new assistance program are dwindling each day.

The Multnomah Pilot Program

There is a small glimmer of hope though. Last month, the Treasury Department approved a new pilot program to assist underwater borrowers without Fannie and Freddie loans.

The so-called “Rebuilding American Homeownership Assistance” (RAHA) Pilot was launched in Multnomah County, which includes the city of Portland.

It’s limited to borrowers with “significant negative equity” who intend to stay in the prpoerty for 5+ years. They must not own any other residential property and be current on the mortgage.

The RAHA Pilot features two refinancing options:

– 30-year fixed mortgage @5%
– 15-year fixed mortgage @4%

The program relies upon the Treasury’s “Hardest Hit Fund” to operate. If successful, it’s possible other states will take part as well.

But again, with all the good housing news streaming in, the odds grow less likely every day.

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