Non-prime RMBS modifications development greater as forbearance falls

Securitized home loans, issued to borrowers with lower credit scores and other exceptional characteristics, saw a dramatic year-over-year increase in rates of change in the third quarter.

Fitch-rated banking service providers saw a particularly high nonprime loan modification rate of 40%, up from 10% a year ago, consistent with the widespread expiration of pandemic-related payment suspensions. The corresponding figure for non-banks was only 19%, but even that figure was significantly higher than a year ago, when only 6.61% of loans had been modified, according to a recent report by the rating agency.

Lending in the heterogeneous private-label home-backed securities sector has not generally been granted the same standardized payment facilities as the government-related market, but service providers treating the former have tended to follow the lead of the latter, to the extent their investor agreements allow. So, as in the pro-government market, lending in the private RMBS sector is moving away from forbearance towards other options, and stakeholders are closely watching the outcomes of this trend.

Nonprime modification rates have become a focus as forbearance and other pandemic-related contingencies are being rolled back, as the extent to which borrowers are requesting changes to their loan terms to accommodate long-term income losses could guide broader loan performance. Borrowers with nonprime loans tend to be more sensitive to the kind of financial pressures that could disrupt payments than borrowers with mainstream mortgages, so they can be among the first to show signs of distress.

Fitch's modification numbers suggest that within the shrinking pool of forbearance borrowers, the magnitude of this strain may be high, but could be manageable if servicers have enough leeway to change loan terms.

"Loan modifications increased significantly as borrowers exited forbearance plans in the third quarter, and forbearances are now down to 43% of all loan workouts, as reported by banking service providers," Fitch CEO Richard Koch said in a release.

“Banking service providers have demonstrated significant mitigation activity over the past year; Non-bank service providers report similar loss mitigation trends, albeit to a lesser extent.”

Between the third quarter of 2020 and the same fiscal year in 2021, banking service providers roughly halved their forbearance rates, according to Fitch's most recent U.S. RMBS Servicer Metrics report. The corresponding decrease for non-bank service providers was 10%.

To date, the reduction in forbearance hasn't had a dramatic impact on default rates, according to Fitch, which reported that the level of loans that are 60 days or more late have plateaued. Mortgages delinquent by 90 days or more have improved "moderately," according to the rating agency's report.

This reflects past trends in the broader market. Serious defaults have eased from their peak amid the pandemic as vaccines and other measures have allowed the economy to recover, but some experts fear variants or higher rates could reverse the trend.

Over the past week, broad-based leniency measures have seen a slight increase in new plan filings, but the recent increase has been less pronounced than the previous one.

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