The Performance of New Private-Label Mortgage Loan Modifications after 2009

Abstract

This paper presents summary statistics and a preliminary analysis of the success rate of loan modifications made in 2010 and January 2011 to residential mortgages securitized in private-label residential mortgage-backed securities. We find that these more recent private-label loan modifications had a higher overall success rate, compared to similar modifications made in earlier years. Consistent with prior literature, having a fixed-rate mortgage, a prime mortgage, a higher Fair Isaac & Company (FICO) credit score, and/or a lower interest rate at origination were positively correlated with lower redefault rates post-modification. Borrowers with interest-only and teaser-rate loans performed slightly better than other borrowers after receiving loan modifications. Similarly, modifications of purchase loans did worse not only than plain vanilla refinance loans, but also worse than debt consolidation and cash out refinance loans. Modifications of private-label mortgages in the four “sand states” – Arizona, California, Florida, and Nevada – did better than modifications in other parts of the United States, although the difference was small. Surprisingly, modifications of fully documented loans performed worse, while modified no-documentation loans performed best. Finally, we confirm that capitalizations of arrears performed worse than interest rate reductions and principal modifications, with the latter appearing to be the most effective.

Keywords: mortgage, loan modification

JEL Classification: D12, D18, G28, G21, K29