The New Plan To Forestall Home Foreclosures Could Have Positive Implications For U.S. RMBS
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| Publication Date: Feb 13, 2008 16:18 EST |
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 | The New Plan To Forestall Home Foreclosures Could Have Positive Implications For U.S. RMBS | |
| | | Publication date: 13-Feb-08, 16:18:36 EST | |
Reprinted from
RatingsDirect
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As the ranks of U.S. homeowners facing foreclosure surges across the country, Standard & Poor's Ratings Services believes the newly announced Project Lifeline is an important, positive development for the U.S. residential mortgage market. Although the ratings impact may be muted on some sectors of the residential mortgage-backed securities (RMBS) market, and it's too early to say what the impact may be on other sectors, it seems clear to us that any actions that lowers the number of foreclosed properties on the market would help U.S. RMBS by reducing future home price declines. Similarly, strategies that succeed in keeping mortgage cash flowing and borrowers in their homes are beneficial. Ultimately, any reduction in the depth and breadth of the current housing decline should translate into lower losses. Project Lifeline, which the Bush administration announced on Feb. 12, is the broadest loan modification initiative to date. It calls for a 30-day foreclosure moratorium on homeowners who are 90 or more days overdue, provided they meet certain minimum standards. Importantly, it covers the full spectrum of mortgage market loans: subprime, Alternative-A, closed-end second liens, and prime jumbo mortgages. Six banks, which are members of the HOPE NOW Alliance, are spearheading the program. They include Bank of America, Chase, Citibank, Countrywide, Washington Mutual, and Wells Fargo. Together, they reportedly service approximately 50% of the nation's mortgage loans. As of December 2007, there are approximately 2.2 million foreclosures nationwide, according to RealtyTrac. So, the need for Project Lifeline is clear because loan servicers have been hard pressed to keep up with the growing ranks of delinquent mortgagors. Borrowers have not always received financial counseling that may have helped them keep their homes. In our view, the "pause" in the foreclosure process that Project Lifeline provides could give servicers and borrowers time to get together and pursue the workout plans needed to prevent more borrowers from losing their homes. Most loans that are currently seriously delinquent (90 days or more) should be eligible for the Project Lifeline program. Loans that aren't eligible are those: 1) in active bankruptcy; 2) in active foreclosure with a sale date less than 30 days away; 3) where the homeowner has indicated he wants to give up the home; 4) that are investment properties; and 5) that are vacant properties.
Potential Impact On RMBS Ratings |
U.S. subprime RMBS ratings |
We estimate loss projections for the vintage 2006 first-lien U.S. subprime RMBS market at 19% in cumulative lifetime losses, which translates into approximately a 42.2% foreclosure frequency rate and a 45% loss given default rate (money not recovered after a default). We project that a 30-day foreclosure moratorium would add approximately 1% to our loss given default assumptions, all else being equal. If no other factors are affected, total foreclosures would have to decline to 41.3%, or by less than 1%, to neutralize an increase in our current loss expectations. Given that our ratings assumptions have incorporated a significant number of loans being modified and no explicit improvement in property values, the impact of this moratorium on our current first-lien U.S. subprime RMBS ratings appears negligible at this point. (Please see, "S&P Takes Action On 6,389 U.S. Subprime RMBS Ratings And 1,953 CDO Ratings," which was published Jan. 30, 2008, on RatingsDirect.) The current surveillance ratings assumptions regarding loan modifications are consistent with scenarios published in "Reviewing The Impact Of Rate Freezes On Rated U.S. First-Lien Subprime RMBS Under Two Scenarios," which was published on Dec. 21, 2007, on RatingsDirect.
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U.S. Alt-A RMBS ratings |
We are currently reviewing our ratings on U.S. RMBS collateralized by first-lien Alt-A mortgage loans. Prior to the announcement of this initiative, Alt-A collateral did not meet loan modifications criteria outlined in the previously announced American Securitization Forum(ASF) Streamlined Foreclosure And Loss Avoidance Framework For Securitized Subprime Adjustable-Rate Mortgage (ARM) Loans (framework) also known as the "Paulson Loan Modification Plan." Since Project Lifeline includes Alt-A borrowers, we will review our assumptions regarding loan modifications and the potential subsequent impact on cash flow and loss expectations. |
U.S. prime jumbo RMBS ratings |
We are currently reviewing our ratings on U.S. RMBS collateralized by "prime" jumbo mortgage loans. Prior to this announcement, prime jumbo collateral did not meet the criteria for loan modifications outlined in the framework. Since Project Lifeline includes prime borrowers, we will review our assumptions regarding loan modifications and the potential impact on cash flow and loss expectations. |
U.S. closed-end second-lien RMBS ratings |
We base our ratings on U.S. RMBS collateralized by closed-end second-lien mortgage loans on loss projections of approximately 44% in projected cumulative lifetime losses for the 2006 vintage. If a significant number of mortgagors agree to loan modifications, it may improve recoveries in this sector. Given our steep loss expectations and without a significant improvement in delinquency pipelines, we don't expect the impact on our outstanding ratings to be material. |
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No Impact Expected On Participating Financial Institution's Ratings |
Similarly, we don't see an impact on the rating for the largest financial institutions participating in the program. The targeted borrowers under Project Lifeline are already 90 days past due, so these loans are already classified as nonperforming assets (NPAs) by these banks and under our definition of a NPA. While the 90-day past-due category of nonperforming loans (NPLs) is the fastest growing and the largest segment of nonperforming mortgage assets at these institutions, the 30-day pause is, in our view, more likely to temporarily stave off the probable event of foreclosure rather than reduce NPLs and credit-related costs. The likely outcome is that some of these loans will qualify for modification, which will be accounted for as a troubled debt restructured loan and still remain classified as an NPL under our analysis. Project Lifeline is formalizing the process of identifying borrowers who could qualify for a loan modification or restructuring, a process that most servicers follow in an effort to reduce the incidence of foreclosures and to limit the credit costs of both the borrower and the lender. (Please see "Subprime Mortgage Modifications Raise Significant Financial Reporting Issues for U.S. Banks," which was published Feb. 11, 2008, on RatingsDirect.
Standard & Poor's will update the market on the implications of this program on its ratings as participating servicers provide additional information. |
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