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Moody's: Subprime Servicers Only Now Increasing Changes to Interest Rate Resets
By James Comtois
According to a recent survey conducted by Moody's Investors Service, subprime servicers on average have only recently begun to materially increase the number of modifications as it relates to interest rate resets.
The survey showed that most servicers had only modified approximately 1% of their serviced loans that experienced a reset in the months of January, April and July of this year.
Additionally, although some subprime servicers have recently begun to make outbound calls to borrowers that will experience reset in the near future, most large servicers, according to Moody's, continue to rely on more passive letter-based contact with borrowers. Given the size of this problem (some servicers reported in the survey that they could experience in a given quarter interest rate resets on loans which constitute up to 15% of their portfolio during the period from late 2007 to 2008), Moody's find this to be of particular concern.
Data from a limited subset of servicers indicated that for loans that were current prior to reset and were not modified, the average delinquency rate after reset was in the 5% to 10% range. However, these results are for loans that were issued later in 2005 and in 2006 and had greater refinancing opportunities as they were not as impacted by the negative home price environment. Moody's expects delinquencies will be higher for subprime loans backing securitizations issued in late 2005 and 2006 and that reset without modification.
Those servicers that have been proactively addressing the issue of interest rate resets on subprime mortgages have instituted a number of practices, including frequent outbound calls to borrowers with a pending reset, typically attempted from the 90th to the 30th day prior to reset; a proactive view and analysis of the number of loans in their portfolios that are anticipated to rest and their potential to default, increased frequency of letter-based contacts with borrowers, outreach via third parties such as credit counseling agencies and governmental assistance programs, and encouraging the use of the servicer's website to give borrowers an opportunity to provide financial information to assess the potential for a modification.
Based on the survey results, Moody's is concerned that the number of modifications that will be performed in the future by subprime servicers on loans facing reset may be lower than what will be needed to substantially mitigate losses in subprime pools backing rated securitizations.
In light of this risk and the current performance of the collateral, Moody's expects further negative rating activity on subprime residential mortgage backed securities issued in late 2005 and in 2006.
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