Services Look to Change Terms on Bad Credit Florida Mortgage Loans

The companies that service subprime loans are becoming more willing to keep struggling borrowers in their homes by modifying the terms of their Florida mortgages, according to a report by Fitch Ratings.
A modification includes any change to a loan, including interest rate or principal reductions, forgiveness of loan payments, extension of loan terms (such as going from 15 to 30 years) or adding unpaid interest to the loan balance.

Historically, instead of actually changing loan terms, lenders have preferred to offer repayment or forbearance programs when borrowers fell behind. These programs let borrowers add missed payments to their ongoing payments, but do not involve any changes to the loan terms.

Historically, modifications “were rarely used” for troubled loans, says Diane Pendley, a Fitch managing director. When they were used, it was usually a “one-off-scenario” resulting from an “unforeseen life-changing event.”

However, based on a survey of loan servicers, Fitch estimates that over the next 12 to 18 months, 5 to 10 percent of all adjustable-rate bad credit Florida mortgages could be modified. This number could represent 40 to 50 percent of subprime ARMs that are in default or headed that way.

Fitch’s survey and report covers only loans that are packaged into mortgage-backed securities, which include the great majority of subprime mortgages.

For investors in mortgage securities, modifications pose a bigger risk than repayment and forbearance plans because modifications usually result in losses and reduced cash flows, Pendley says. Fitch rates mortgage-backed securities.

When borrowers run into trouble, repayment and forbearance programs are still the most popular loss-mitigation strategies in order to avoid foreclosure. Loan servicers are offering them in 50 to 75 percent of cases. The terms are also becoming more generous.

“Instead of three to six months, they are going out much farther - 12 to 24 months,” says Karen Eissner, a senior director with Fitch.

Nevertheless, servicers report that “repayment and forbearance plan effectiveness is decreasing.”

Servicers also told Fitch they are having a harder time contacting borrowers who are delinquent or likely to be when their adjustable-rate mortgages reset. One probable reason is that more people today have caller ID and can avoid answering calls from creditors, Pendley says.

Also, many people who took out subprime loans in the last few years did not have to document their income. They might be afraid they would have to prove it now. “The servicers are trying to convince them” that won’t happen, Pendley says.

A bigger problem: To get a lower Florida mortgage rate, some borrowers said they were planning to live in a home they were really buying to rent or flip. For obvious reasons, they don’t want a servicer showing up at the door.

In the past, modifications were not used much because most borrowers ran into trouble because they lost a job, got divorced or had a financial emergency such as a crushing medical bill. A repayment plan was usually enough to help them over the hump. If it wasn’t enough, they could usually sell their homes and pay off the Florida home loans with the proceeds.

This time around, repayment plans won’t work for many people who took out loans with low introductory rates that were fixed for two years or so. When the rates go up, they simply won’t be able to afford their payments, even if they don’t face financial emergencies. Many of these borrowers can’t sell their homes and pay off their loans, nor can they Florida mortgage refinance, because they have no equity in the home - often because they put little or nothing down and the value of the home has gone down.

For these people, modifications are the next-best option.

Pendley says the modification that lenders are most willing to make is extending the fixed-rate period for another year or two in the hope that, during that time, the value of the home will increase so the borrower can sell or refinance.

Despite the Fitch forecast, people who work with troubled national or Florida home mortgage borrowers are not seeing a big increase in modifications yet.

“We have seen 35 cases in the last six months where folks are in a subprime mortgage that is about to adjust and would like a modification,” says Jane Duong, homeownership program manager with the Mission Economic Development Agency in San Francisco. “A few of them, less than five, got a forbearance or repayment plan. I have yet to see loan terms modified.

Duong says the main reason servicers can’t modify a loan is because it is in a security that prevents or severely limits a servicer’s ability to alter terms.

SOURCE: The San Francisco Chronicle