Step-up Interest Rates and the effect on Deal Performance
The Making Home Affordable © (MHA) data file provided by the U.S. Treasury tells us exactly what payment shock borrowers will experience at all future step-up dates. For the first rate step-up, the payment percentage increase is approximately 12.8%, ranging from a low 5.42% for loans with one step-up to 14.68% for loans with four step-ups. Currently, non-GSE HAMP step-ups will peak in the 2nd quarter of 2017, with 67,055 loans experiencing a payment increase averaging 11.52%. For non-HAMP modifications, US Bank, BNY Mellon and Wells Fargo provide limited loan level data on interest rate step-ups.
Question: The question we will try to help you answer is how do modification’s step-up interest rates affect deal performance. We have about a year’s worth of data that we can start analyzing.
Conclusions: Do not worry about step-ups. For the most part, borrowers are not defaulting en masse and for those that do default servicers are re-modifying the loan. The varying WAC drift that we see shows that although step-ups do increase the interest rate by on average 100 basis points, overall it is not having too much of an effect on gross WAC given that liquidations, payoffs, additional modifications and normal ARM resets also play a part. For some deals that have already had significant modification step-ups, we just do not see much change to performance or gross WAC. Tables are included in today’s commentary to back up our conclusions.
Supplemental Data File: To help you analyze your portfolio, we have attached to today’s commentary a deal level file with our estimates of
1) The percentage of loans with interest rate step-ups that have not yet occurred (2016 and beyond) and
2) The expected payment shock.
As we do not have data on every deal and our matching algorithm for the Treasury data does not match every loan on LoanPerformance, we know our estimates for some deals are lower than actual. However, this is still the most complete estimate available.
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