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Announcement:

Moody's: Credit impact of Patrimonio's loan modifications on certain Mexican RMBS could vary depending on the transaction and program implementation

28 Jun 2013

Mexico, June 28, 2013 -- Moody's de México S.A. de C.V. (Moody's) announced today that the loan modification program that Patrimonio S.A. de C.V. SOFOM E.N.R. (Patrimonio) plans to implement in connection with eleven RMBS transactions could have mixed results depending on the transaction and the assumptions used in the analysis. Moody's will monitor the implementation and results of the program as information becomes available.

Moody's cautioned that the final assessment of the impact will depend on (1) the loss severity assumed for defaulted loans; and (2) the re-default rate of modified loans. Moody's notes that it is currently reviewing the severity of loss assumptions on six of the affected deals (MXMACCB 05U, MXMACCB 06U, BRHSCCB 05U, BRHCCB08U & 08-2U & 08-3U, PATRICB 06U and PATRICB 07U). In addition, there is considerable uncertainty regarding re-defaults and loan severities given the limited amount of data available.

In principle, a loan modification program could have a credit positive impact on a transaction, because it could turn highly delinquent loans (most of which are 360+ days delinquent) into performing, cash-flowing collateral. However, such programs could lead to a higher severity of loss depending on how the servicer implements the program and how the modified loans perform.

In order to analyze whether the impact on the transaction is credit-positive, negative or neutral, Moody's estimated the loss severity that could result from implementing the program on the affected deals, and compared it to the loss severity assumed currently.

Moody's considered the following factors: 1) a re-default rate of 55%, which indicates the percentage of loans that re-default after being modified; 2) the loss severity currently assumed for each transaction; and 3) a maximum principal forgiveness of 30% of the loan's outstanding balance, which is the maximum the servicer can provide a borrower.

The following are Moody's loss severity assumptions assuming implementation of the loan modification program compared to Moody's current loss severity assumption:

-- MXMACCB 05U: 46% compared to 42% assumed currently.

-- MXMACCB 06U: 47% compared to 45% assumed currently.

-- BRHSCCB 05U: 47% compared to 44% assumed currently.

-- BRHCCB08U, BRHCCB08-2U & BRHCCB08-3U: 46% compared to 42% assumed currently.

-- PATRICB 06U: 53% compared to 60% assumed currently.

-- PATRICB 07U: 53% compared to 60% assumed currently.

-- MXMACFW 06U & 06-2U: 56% compared to 67% assumed currently.

-- MXMACFW 07U & 07-2U: 56% compared to 68% assumed currently.

-- MXMACFW 07-3U & 07-4U: 56% compared to 68% assumed currently.

-- MXMACFW 07-5U & 07-6U: 57% compared to 69% assumed currently.

-- BRHCGCB 04U: 58% compared to 73% assumed currently.

However, Moody's notes that it is in the process of evaluating its current loss severity assumptions for Mexican RMBS due to rising concerns about the potential for a higher loss severity on defaulted loans.

LOAN MODIFICATION PROGRAMS

Modifications will take one of the following forms: 1) "Apoyo con quita" (discount on past due amount) which consist in deferring a percentage of past due installments, with the possibility of forgiving a portion of this amount; 2) "Reducción permanente de la mensualidad con quita" (permanent reduction of the monthly installment) which consist in a discount to the outstanding balance of a delinquent loan, reducing the monthly payment permanently; 3) "Finiquito o venta de derechos litigiosos" (total liquidation) which consist in a discount to the outstanding balance if the loan is paid in full; and 4) "Dación en pago con incentivo económico" (deed-in-lieu with economic incentive) which consist in obtaining a deed-in-lieu by providing an incentive to the debtor. For both the first and second products, the servicer can forgive principal only if the borrower remains current after modification of the loan during four years for the first case, and permanently for the second one.

Moody's based its current opinion on preliminary information it has received from the servicer about the modification program; Patrimonio has yet to finalize the transaction agreements to reflect the program guidelines. Based on the information received, Moody's has identified a number of credit-positive aspects to the program:

- The servicer cannot modify current loans. To qualify for a loan modification, the borrower must be delinquent. For the modifications that entail the largest discounts, the loan must be at least 12 months past due; however, if the loan is between 6 and 12 months delinquent, it is subject to detailed analysis and to the approval of a special servicer's committee. In addition, for all cases, the servicer must make sufficient efforts to collect before offering a modification.

- The principal haircut cannot be higher than 30% of the outstanding balance of the loan, which limits the servicer's discretion when negotiating the haircuts.

- The potential recoveries on the modified loan must be higher than the potential recoveries from the judicial foreclosure process. In order to maximize collections from collateral, the servicer must conduct a net present value analysis to satisfy this condition for each individual loan it plans to modify.

- The servicer must negotiate modifications for each loan individually, rather than as part of a general program. Doing so will be positive because the servicer will be able to gain a better understanding of a borrower's financial situation and thus better assess the causes of default and the borrower's willingness to pay, which will determine what type of modification it should offer.

- When granting a modification, the servicer must first obtain from the borrower a judicial agreement which permits recovering the house in a shorter period of time, in case of re-default.

- The servicer cannot provide more than one modification per borrower.

- For the purpose of calculating over-collateralization (OC), the servicer can consider modified loans "current" only if they have been current for at least twelve consecutive months following modification.

In general, from an industry perspective, loan modification programs also entail risks:

- The current servicing fee structure might not always fully align the interests of investors with those of the servicer. By charging a higher fee for current loans, the servicer could be tempted to provide modifications to borrowers who do not deserve them or to re-modify a loan. This is especially a risk if, for the purposes of calculating the servicer fee, modified loans can be considered "current" just after being restructured, with no time elapsed to show sustained payment.

- The servicer could offer modifications without making adequate efforts to collect from borrowers or offer loan modifications to a large number of obligors, increasing the risk of moral hazard.

- If the servicer does not document the loan modifications properly, the amount of time necessary to repossess the collateral could lengthen significantly.

- Even within the guidelines, the servicer has some discretion with regards to implementing the loan modification program. For example, the program allows the servicer to determine the key assumptions it uses to calculate the net present value of the loss of a modified loan, when compared to the net present value of the loss of a foreclosure process.

- A lack of transparency and inadequate reporting of loan modifications will render more difficult the ability to accurately assess the full impact of the loan modification program on the credit quality of the pool.

Moody's does not express an opinion as to whether the proposed modification program could have other, non-credit-related effects. Moody's opinion is based in part on how the servicer has stated it expects to implement the program. Further, Moody's current opinion does not preclude the possibility of a downgrade or withdrawal of the rating for any reason, with respect to the implementation and effectiveness of the loan modification program and any adverse effect it might have on the credit quality and performance of the affected transactions. As always, Moody's will continue to monitor the transactions' performance to assess impact of the loan modification program upon implementation.

Carlos Gonzalez
Asst Vice President - Analyst
Structured Finance Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Maria Muller
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Moody's: Credit impact of Patrimonio's loan modifications on certain Mexican RMBS could vary depending on the transaction and program implementation
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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