“A friend attended the MBAA National Mortgage Servicing Conference recently and told me about a presentation at the conference. The presenter, a subprime servicer, apparently projected that 80% of their loans will default at recast. To combat this problem, they will go to the extreme of offering the defaulting borrower fixed rate mortgages at the rate prior to recast. The reason this is not widely publicized is obvious. They do not want to encourage widespread defaults.
So how many defaults are cured? Is this a long term fix or just a short term band-aid?”
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More evidence that the lenders and servicers – in whatever form they exist – simply do not want to be in the business of home ownership and sales. They will – as stated above – “go to the extreme” to avoid foreclosing. Lenders and servicers position in this regard is well known within the industry. They have always attempted to avoid foreclosing if possible.
To answer the two questions posed, I would say that putting the homeowner into a fixed rate at the pre-recast rate will cure the vast majority of defaults – at least initially – by avoiding the massive jump in payments correlated to the higher interest rate at recast. Then it just becomes a matter of the status of personal income being maintained.
There is a huge difference between not being able to pay your mortgage because you don’t have a job (circa early 90’s) versus not being able to afford a higher payment after recast. In the early 90’s, there was nothing lenders/servicers could do – no job = no payments. They had nothing to work with. Today’s scenario is much different. It will take job loss or substantial reduction in income to turn a borrower into a lost cause. Some feel that such a scenario will occur due to job losses in the housing industry. We’ll see. But if the spector of recasts leading to massive foreclosures is removed, one leg of the stool supporting housing bears will be removed. Lender/servicer loss mitigation is likely to have a huge impact on how housing values evolve.
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