Borrowers face a mortgage affordability test from lenders amid plans by the Financial Services Authority (FSA) to step up the regulation of home loans.
Self-certification mortgages will be banned under the proposals with lenders required to verify borrowers' incomes.
The results of programmes to modify the terms of home loans for struggling borrowers have thus far been disappointing, according to research from Fitch Ratings.
While the number of home loans receiving modifications has risen in response to government schemes to encourage mortgage servicers to reduce borrowers’ payments, more than half of modified home loans fall back into arrears within months, said the rating agency.
Meanwhile, many borrowers with trial modification plans under the government’s programme are slow to complete documentation requirements or make the trial payments that would allow them to convert to a permanently modified loan.
As of September 2009, approximately 10 per cent of all loans packaged into mortgage bonds – including 25 per cent of all subprime loans in such bonds – have been modified at least once. This is up from 3 per cent and 7 per cent, respectively, a year ago.
However, Fitch estimates that between 65 per cent and 75 per cent of modified home loans default again within 12 months. This figure includes loans that are modified for a second or third time. Around 11 per cent of all modified loans in mortgage bonds have been modified for a second time, Fitch said.
Diane Pendley, managing director at Fitch said: “Ultimate modification performance or sustainability will still primarily hinge on whether the borrower wishes to keep the property, as well as having sufficient cash flow to make the modified payments.”
While the guidelines for the government’s mortgage modification programme were intended to ensure that borrowers had enough cash flow to make their new modified housing payments, recent evidence from mortgage servicers is showing that many borrowers are not keeping up with payments on trial modifications, the rating agency said.
“Borrowers may still be unable, if their other debts are excessive, or unwilling to continue making payments on a home where they will see little or no timely possibility for equity return,” said Ms Pendley.
Modifications of home loans under the government’s “Making Home Affordable” scheme are finalised once all the borrowers’ documentation is complete and borrowers have made their payments for three months.
The plan, which has been in place for six months, has thus far seen few such conversions, according to government statistics. As of September 1, only 1,711 of the over 360,000 loans placed on a trial modification had been converted to permanent status.
Source: Financial Times