Fitch: FHFA Principal Reduction Plan Could Raise Costs for Servicers

Fitch Ratings, New York, said the Federal Housing Finance Agency’s recently announced Principal Reduction Modification program could moderately raise expenses for servicers handling delinquent Fannie Mae or Freddie Mac loans, but should not affect rated residential mortgage-backed securities transactions.

FHFA announced last week (http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-PRM-Program-and-Further-Enhancements-to-NPL-Sales-Reqts.aspx) the principal reduction for seriously delinquent, underwater borrowers. Borrowers who meet this criteria will be offered a modification to mirror current streamlined modifications. The program is a one-time offering for 33,000 agency borrowers and who meet specific eligibility criteria.

Mortgage Bankers Association David Stevens, CMB, noted the program’s narrow focus on lower loan balance and severely delinquent mortgages and said mortgage servicers have been actively working to help borrowers through the Home Affordable Mortgage Act and other modification programs. “This provides them another tool with which to do so, although it is important that consumers understand that FHFA and the GSEs will be identifying borrowers for eligibility,” he said.

Fitch Managing Director Roelof Slum said the program could cause more distressed borrowers to contact servicers, which could raise customer service costs in the short run. He added servicers might also take on higher technology costs as underwater borrowers who meet the program’s eligibility criteria must receive a solicitation letter containing terms for a modification from their servicer no later than October 15.

“The incremental effort and expenses that servicers put forth should decline after that date and Fitch does not believe that this program will have an impact on its servicer ratings,” Slump said

Fitch said the impact on the residential market should be limited by several factors:
–General home price increases have already reduced the number of borrowers that are underwater.
–Many borrowers had previously been helped through the Home Affordable Refinance Program and the Home Affordable Modification Programs.

“Non-agency mortgages are not eligible for the program and Fitch-rated agency risk-sharing deals have exhibited very strong performance and low delinquencies, making those borrowers unlikely to qualify,” Slump said.