Strategic Defaults and Foreclosure
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The credit success of RMBS (Residential Mortgage Backed Securities) in America is facing multiple challenges in the current year. The biggest danger is from strategic defaults as per the findings of Moody’s Investors Service.
The general view is that in 2012 the waters will not be turbulent but calm. Moody’s study shows that stability signs are showing in the performances of outstanding loan pools of the residential housing sector. This means that the loss calculations from RMBS will remain unchanged.
Debash Chatterjee the managing director of an associate of Moody’s said, “Although Delays in loan liquidation timelines and an increase in distressed sales will continue to dampen housing prices and limit recovering on delinquent loans, they will not have a material impact on RMBS pools”.
Due to modification of loans, the delinquency among the loan pools has not only remained flat but in some instances these are also dropping. The rates of re-default on loans that have been modified have also dropped thanks to reduction of payments in the modifications being made bigger.
But strategic defaults where the borrower intentionally walks away from the house and foreclosure are posing risk causing the possibility of property prices to tumble again in 2012.
The agency predicts that the risk is coming from the big sector of mortgages where over half the house owners have gone underwater – the value of the house being less than the loan due amount. Till now they have been regular in making payments on their housing mortgages but since the latter part of 2010 the negative equity among the big borrowers have “risen significantly”.
The sub-prime sector however is facing the least risk of deterioration in this current year because the weaker borrowers have already been weeded out. The risk clouds hover over Alt-A and option-ARM loans but not as much as in the jumbo segment; of the two option-ARM is posing greater risk.
William Fricke of Moody’s (vice president cum senior credit officer) explained that modifications and forgiveness of principal are the two key factors that can stop strategic defaults. But he apprehends that servicers will be reluctant to take recourse to this because GSE does not allow and that many RMBS too carry clauses putting brakes on this practice.
The methods of servicers are changing – they are becoming more easily accessible to the borrowers through single point of contact. The issuance of RMBS will be small because of GSE dominance and uncertainty about what moves the regulators will take.
