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FEATURE SECONDARY MARKET A Fresh Look at Loss Mitigation Why today's marketplace mandates new methodology for lenders looking to limit potential losses on mortgage loans. By Brandy King-Cutler I loss mitigation due to the sheer volume of troubled loans. Six years later, the continued elevated default rates and disappointing results in the loss mitiga- tion efforts warrant a fresh look at revamping loss mitigation programs. t started with the crashing real estate values in 2006. Unprecedented amounts of mortgage defaults caught many servicers off guard, unable to meet the needs of homeowners for the industry for government- sponsored enterprises Fannie Mae and Freddie Mac and those responsible for the federal Home Affordable Modification Program (HAMP) to get the loss mitigation performance numbers up. One theme being repeated is for the programs to be more aggressive in writing down principal to keep borrowers in homes. With the swelling backlog of foreclosure inventory and unsuccessful loss mitigation There is a call by many in efforts, there are a number of associated issues that servicers face: heavy compliance and oversight by federal, state, and local governments, and the ever- expanding role of caretaking abandoned and vacant houses. Meanwhile, the real estate market shows very little signs of improvement and millions of displaced homeowners are scrambling to find affordable housing, meeting a rental market of inadequate inventory and rising prices. A Look Back T government was to incent loan servicers to make payments affordable by reducing interest rates through modification pro- grams. In 2009, the government introduced the Making Home Affordable plan in an effort to stabilize the housing crisis. With that came HAMP, a national program to modify non-GSE mortgage loans. HAMP was the government's intervention intended to boost loss mitigation efforts by incenting servicers to stem the crisis. Concurrently, state and federal governments, as well as the GSEs, began tak- ing their own steps to address the crisis. Despite the good intentions of he initial solution attempted by the GSEs and the federal HAMP and the GSE programs, these traditionally effective efforts have been largely unsuc- cessful. It's estimated that the re-default rates on recently modi- fied mortgages are as high as 50 tremely high compared with previous years under a more stable economy. Research shows that loans modified between 1995 and 2000 had default rates of 20 mortgages from the beginning of 2008 through the end of the third quarter of 2011. At the end of the fourth quarter of 2011, 48.3 percent of these modifications remained current or were paid off. Another 8.5 percent were 30 to 59 days delinquent, and 17.4 percent were seriously delin- quent. Almost 11 percent were in the process of foreclosure, and 6.1 percent had completed the foreclosure process. More recent modifications that emphasized reduced payments, affordability and sustainability have outper- formed modifications implement- ed in earlier periods. This re-default rate is ex- THE M REPORT | 75 percent, per the OCC Mortgage Metrics Report, 2011. An excerpt of the report regarding default rates and re-default rates of loan modifications is as follows: Servicers modified 2,395,5656 ORIGINATION SERVICING ANALYTICS SECONDARY MARKET