Mortgage modifications may not be the solution to the nation's housing problems, after all. Fitch Ratings predicts that 65 percent to 75 percent of modifications on subprime mortgages will redefault in 12 months
. The redefault level predicted for prime loans that have been modified is slightly lower -- 55 percent to 65 percent within 12 months of modification.
Along with foreclosures, the use of short sales and short payoffs increased in 2009, according the the recent report from Fitch. "Currently 50 percent of prime and 35 percent of subprime and Alt A distressed liquidation sales are not by REO [lender-owned] sale," according to Fitch. The percentage of loans that ended up in foreclosure was 25.7 percent by the end of 2009, up from 11.7 percent in the first half of that year.
All those statistics show how little can be done to help people as long as the job market continues to be weak.
Yet Fitch said that "potential new moratoriums and mandated mediations are becoming more widely required," which Fitch thinks will delay final resolution on many of these properties until sometime in 2012. So we're still looking at distressed sales impacting the housing market for at least another two years. Maybe these delays will be long enough to help some people find a job and keep their homes.
The good news for borrowers looking to get out of property underwater is that short sales appear to be increasing in popularity. While lenders have discouraged short sales until recently, the use of short sales has increased since mid-2009.
California leads the way in the use of short sales. Fitch found that 50 percent of all short sales or short payoffs were located in California. About 8 percent were in Florida and 7 percent in Arizona. With new guidelines from the Obama administration changing the rules for short sales
, Fitch expects the percentage of loans "liquidated outside of REO sale will continue to increase."
Even when a home defaults, it does not necessarily result in foreclosure. Fitch found that about 15 percent of all modified non-agency residential mortgage back securities (RMBS) get additional modifications. Of the modifications that were completed in the first quarter of 2009, 18 percent have been remodified to date.
The data for the U.S. Treasury's Home Affordable Modification Program (HAMP) still are not available, since the first completed modifications under HAMP were seen in July 2009. Of the 1.7 million loans identified as HAMP eligible, 1.4 million were offered a trial plan by their servicer, but only 299,000 had actually converted to a permanent modification plan. Fitch expects that these modifications will default at about the same rate as the RMBS modifications.
Those modifications could show up later in the process, since the reduced payments are allowed over a five-year period. Then the payments increase to established caps.
When those payments start increasing another wave a defaults could be been.
Lita Epstein has written more than 25 books, including "The 250 Questions Everyone Should Ask About Buying Foreclosures."