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Slowdown in Loan Mods Means Foreclosures Unavoidable


A slowdown in loan modifications means loan servicers will actually have to begin foreclosing on the many borrowers unable to keep up with their mortgage payments, instead of kicking the can down the road, according to a new report released today by Fitch Ratings.

Last month, just 36,500 loan modifications were completed, well below the peak of 86,500 back in April 2009.

And while efforts by both Hope Now and HAMP resulted in about 1.75 million modifications in 2010, foreclosure sales exceeded the one million mark.

On the surface it sounds pretty good, but you have to take into the account the many loans hundreds of days behind on payments, but not yet foreclosed.

“The combined efforts of HAMP and other mortgage loan modification programs have made little more than a dent in the large volume of outstanding distressed loans,” said Diane Pendley, Head of U.S. RMBS Operational Risk, in a release.

“While not meeting volume projections, HAMP did assist in standardizing the reduction of payments and focused more attention on the use of modifications.”

However, Fitch still sees a catastrophic re-default rate, with 60-70 percent of subprime and Alt-A loan mods re-defaulting, and 50-60 percent of prime mortgages.

Meanwhile, both short sales and deeds in lieu of foreclosure have increased, and are expected to become more commonplace in 2011.

As of December 2010, 53 percent of Prime, 34 percent of Alt-A, and 32 percent of subprime liquidations were not by foreclosure sale.

The big question is how banks and mortgage lenders will handle the liquidation of all the excess housing inventory, known as shadow inventory, without dragging home prices lower.

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