The friend I referenced above just forwarded me this piece out of CSFB’s asset-backed research department. The summary is quoted directly below. It implies that modifications and the like will be increasing going forward. I’m sure this report is more-or-less accurate, but remember what CSFB’s bias is: they would prefer, if at all possible, to not raise alarm bells that would trash the value of the billions of dollars worth of ABSs they’ve put together. Again, I’m not saying these findings aren’t correct, just noting what CSFB’s bias is.
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CSFB Research
The Day After Tomorrow: Payment Shock and Loan Modifications
Summary
• Billions of dollars of subprime hybrid adjustable-rate mortgage (ARM) loans are set to reset in 2007. Compounding this is a weak housing market and subprime lenders’ significant tightening of underwriting guidelines, which will no doubt remove the refinance option for many of the subprime borrowers facing reset.
• Adding to the above is a philosophical shift in servicing practices from rapidly moving delinquent loans into foreclosure to keeping borrowers within the home. We found that many ABS deal documents give servicers a fair degree of leeway in working with borrowers.
• While the number of loan modifications to date has been relatively small, this can be partly explained by prepayment speeds that have remained relatively fast around the first reset. Therefore, servicers have not yet needed to employ
modifications in any significant amount.
• Loan modifications are a double-edged sword. They can lessen ultimate losses, but may also reduce excess spread, delay losses to when excess spread is lower, and mask true borrower hardship. For these reasons, servicers will likely
utilize loan modifications prudently and will enhance their current modification reporting.
• Loan modifications may alleviate to some degree the widely anticipated wave of foreclosures. We expect that both the magnitude of foreclosures will be less than commonly thought and the time span over which they occur will stretch out. Foreclosures will undoubtedly increase significantly, in our view, but modifications should attenuate the magnitude and change the timing.
