Investors Divided on Principal Write-Downs: DBRS

Real Estate Agent with Palatium Auction and Appraisal Service, Real Estate Auctions, Estate, Moving, Downsizing Auctions 618-233-1000 USPAP Appraisals

The U.S. Treasury announced plans in late March to incorporate principal reductions as part of the Home Affordable Modification Program (HAMP) for distressedborrowers who owe more on their mortgage than the home is worth. The move has sparked a heated debate over the ramifications of mortgage debt forgiveness.

On one side, proponents argue that negative equity has become one of the primary triggers of default, and of re-default even after the original mortgage is modified using the typical waterfall of rate reductions and term extensions – when plagued with negative equity, borrowers essentially have little at stake in keeping their homes. Supporters of an industry-wide initiative to slash outstanding principal when it towers above the property’s value say it’s a strong incentive for homeowners to stay current on a newly modified loan and could deter delinquencies in a market already saturated with defaults.

On the other side of the fence, critics question the fairness of the principal write-down practice when most homeowners are continuing to pay their mortgages every month, some of them cutting corners and tightening their belts to do so. Other opponents are asking just where do you draw the line – is a mortgage no longer a contract that carries with it a pledge by the borrower to repay the amount of money agreed upon? They say mandates to retroactively rewrite the loan amount could have serious implications for the future of lending and the risks associated with extending credit.

According to commentary released this week by analysts at the credit ratings agency DBRS, as a modification technique, debt forgiveness has long been regarded as controversial in the mortgage industry due to its moral hazard risk and the potential impact to the performance of mortgage-backed securities (MBS). As a result, the firm says this particular form of modification has been utilized on a very limited basis by mortgage servicers.

DBRS points out, though, that the new HAMP directive for principal reductions, which isn’t expected to be operational until this fall, aims to reduce the moral hazard risk by encouraging borrowers to be more responsible over time. HAMP servicers are required to consider debt forgiveness as an alternative modification by reducing the principal balance of the loan to 115 percent of the current value of the home. Servicers will initially treat the write-down amount as forbearance and will forgive the forborne amount in three equal steps over three years, as long as the borrower remains current on payments.

The ratings agency says investor reactions to the government push for an increase in debt forgiveness has been mixed at best.

Senior and subordinate bondholders often have split views on the issue because in a traditional debt forgiveness scenario, the principal forgiven will be treated as security losses and be absorbed first by subordinate holders. Many investors who in recent years bought subordinate bonds based on their “interest-only” values will see these bonds deplete faster than initially anticipated, DBRS’ analysts explained. Senior investors, on the other hand, while losing some immediate credit enhancement, may benefit from such modifications, as overall cumulative losses should lessen in the long run.

Even within the senior bondholders’ class, DBRS says super senior and senior mezzanine investors may also disagree on debt forgiveness. Although both are senior bonds, certain senior mezzanine tranches will likely benefit more when principal is forgiven. The agency’s analysts explained that this would occur if the subordinate write-downs cause the “cross over” from sequential to pro-rata pay among all senior bonds to occur sooner, allowing the senior mezzanine bonds to start receiving principals sooner than expected.

“If done properly, DBRS believes that transactions should, in the long run, benefit from principal forgiveness,” the company’s analysts wrote. “Although securities average lives may be extended, some borrowers could prepay and cumulative losses could be reduced if the housing market recovers in the next few years.”

DBRS says implementing debt forgiveness may also moderate the ever-increasing delinquency pipeline by curtailing roll rates from 90-plus days delinquent to foreclosure and from foreclosure to REO, and as a result will help shrink the housing supply and trim down distressed sales in some regions.

Read the story

Posted by

Paul Roesch
Realtor, Auctioneer, CAI, AARE, CES, GPPA, ATS
Marketing Director 
Certified Distressed Property Expert, CDPE
618-407-8479 cell

 Add me as a Friend on Facebook Paul M. Roesch                                                                        

Free Sign Bidder Early Bird Notification of Upcoming Auctions

Auctionitnow  Father Time Auctions St Louis MO

All original text, video, and photo content is the exclusive property of Paul Roesch and / or Palatium Auctions (the Company) and may not be used without expressed written permission. All information deemed reliable but not guaranteed. All personal, real and intellectual property is subject to prior sale, change or withdrawal. Neither the Company or information provider(s) shall be responsible for any typographical errors, misinformation, and misprints and shall be held totally harmless. Listing(s) information is provided for consumers personal, non-commercial use and may not be used for any purpose other than to identify prospective properties consumers may be interested in purchasing. The Company has no control over the quality, safety or legality of the Auction Items listed, the truth or accuracy of the listings or any other information provided by Sellers about the Items. Listings may be sold, withdrawn at any time or subject to change without notice.


This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
ActiveRain Community
paul roesch st louis real estate auctions
auction it now
father time auctions real estate st louis mo
underwater write downs

Post a Comment
Spam prevention
Spam prevention
Post a Comment
Spam prevention

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?


Paul Roesch CDPE 618-233-1000

Real Estate Auctioneer CAI St Louis MO Auctions
How Does an Auction Work
Spam prevention

Additional Information