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AMHERST MAKES CASE FOR PRINCIPAL REDUCTION AS MOST EFFECTIVE MODIFICATION Amherst Securities recently released a report declaring principal reduction modifications, without question, the most effective form of modification. Between three types of modifications— principal, rate, and capitalization—the controversial and much-debated principal reduction mod was found to be the most effective based on its 12-month re-default rate. The Amherst report, which was co-authored by housing analyst Laurie Goodman, counted principal modifications as mods involving a balance reduction; rate mods are essentially an interest rate reduction, and a capitalization mod is when the delinquent amount owed gets added to the principal balance without charging interest. The Federal Housing Finance Agency (FHFA) does not permit Fannie Mae and Freddie Mac to apply principal reduction modifications to their loans, but among privatelabel mortgage-backed securities (RMBS), Amherst's study found, in 2012, principal modifications account for almost 40 percent of total modifications, up from 25 percent in 2011 and 11 percent in 2010. For 2011 modifications, the re-default rate after 12 months for principal modifications was 12 percent compared with 23 percent for rate modifications and 30 percent for capitalization modifications, according to the report. Other factors leading to a successful modification include more significant payment reductions, modifications made earlier in the delinquency process, and mods better tailored to borrower characteristics. Amherst backed claims of pay relief as means for a successful mod by pointing to data on 2011 modifications, which showed that mods with pay relief less than or equal to 20 percent had a 12-month re-default rate of 30 percent while those with pay relief greater than 60 percent had a re-default rate of just 12 percent. Timing was also named as an important factor. "If a borrower is offered a 30 percent pay reduction immediately upon becoming delinquent, that person is apt to feel very good about the new modification—he is getting a 'deal.' Offering the same modification after a 15-month period of mortgage non-payment is going to appear less attractive," the report stated. In 2011, close to 30 percent of borrowers who were 12 months or more delinquent when modified re-defaulted after about a year of 16 making their modified payments while less than 20 percent of those who received a mod while delinquent by two months or less re-defaulted after a 12-month period. The report also notes that the earlier a HAMP mod is completed, the more compensation a servicer receives from Treasury. For example, if a modification is done for a borrower who is less than 120 days delinquent, Treasury gives the servicer $1,600; for borrowers 120–210 days delinquent, servicers receive $1,200; and for borrowers who are 210 days delinquent or more, the servicer gets just $400. Prior to this incentive structure introduced in July 2011, servicers received a flat $1,000 on all completed modifications. Even with the incentives, the trend over the years has been to give modifications at higher levels of default. In 2008, about 5 percent of borrowers received modifications when they were 12 months or more delinquent, but in 2012, the number is about 40 percent. Amherst notes that FICO credit scores are also related to the success of a modification. In general, borrowers with lower credit scores had higher rates of re-default. When comparing the effects of a principal modification versus a rate modification on borrowers according to their credit score, the report showed that principal mods were more effective than rate mods for all credit scores. In 2011, borrowers with FICO scores higher than 740 and with a principal mod had a 12-month re-default rate of about 5 percent while the rate was close to 15 percent for those who received a rate mod. The number of borrowers who received a second mod is also rising. In 2008, 5 percent of borrowers had a second mod while, in 2012, 35 percent received second mods. Although Fannie Mae and Freddie Mac loans are not eligible for principal reduction, the report projects more principal mods to come for two reasons. Through the $25 billion robo-signing settlement, the nation's five largest mortgage servicers—Ally/GMAC, Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo— must offer $10 billion in principal reduction for underwater borrowers. Treasury also tripled its incentives for Principal Reduction Alternative (PRA) mods. PRA was introduced in October 2010 and is offered through HAMP. WINNING BIDDERS SELECTED FOR REO-TORENTAL INITIATIVE The winning bidders in the federal government's REO-to-rental pilot initiative have been selected. The Federal Housing Finance Agency (FHFA) says the deals are expected to close early in the third quarter. The names of the investors behind the winning bids were not disclosed, but Colony Capital LLC and Cogsville Group LLC continue to surface in discussions surrounding the REOto-rental pilot sale. Colony Capital set up a new management company, Colony American Homes, to purchase single-family homes and execute a residential rental strategy across the United States, with plans to acquire $1.5 billion of rental homes by next April. FHFA's REO-to-rental pilot program first launched in February in select markets where inventory is high and rental units are in demand. About 2,500 single-family REO properties owned by Fannie Mae were put up for sale for the pilot. Investors were asked to submit an application to qualify to bid on the properties and were evaluated based on such factors as financial ability, asset management experience, property management expertise, and familiarity with select locations. "FHFA undertook this initiative to help stabilize communities and home values in areas hard-hit by the foreclosure crisis," said Edward J. DeMarco, acting director of the FHFA. "We are pleased with the response from the market and look forward to closing transactions in the near future." The program did face opposition in California, where 19 of the state's lawmakers urged DeMarco to exclude California from the program. They argued that the initiative would only further depress local markets because housing inventory remains low throughout the state. Riverside and Los Angeles were two of the markets selected for the program. STAT INSIGHT 109,000 Short sales completed during the first quarter of 2012, a three-year high. Source: RealtyTrac

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