Rating Agency Sees Benefit in Loan Modification Strategy.(Fitch Ratings)

Commenting on a new servicing technique employed by GMAC-RFC in some residential mortgage- backed securities deals, Fitch Ratings said that loan modifications can be a useful loss mitigation technique when appropriate steps are taken to minimize losses and protect investors.

However, Fitch said that the ability of the servicer to administer and report modifications within the parameters of the deal as well as the type of modifications without appropriate controls could result in increased credit enhancement requirements.

"A servicer that utilizes unlimited modifications or modifications without appropriate controls could result in increased credit enhancement. Alternatively, a highly rated servicer combined with the appropriate controls and modification limitations could result in minimal to no increase in credit enhancement," Fitch said.

The new servicing technique to be performed by GMAC-RFC's Homecomings unit, which has received Fitch's highest ranking as a residential primary servicer, will allow for the capitalization of unpaid interest and other delinquent amounts as a loss mitigation alternative to foreclosure. As a result of certain controls put in place by GMAC-RFC, Fitch has determined that it was not necessary to increase credit enhancement levels to GMAC-RFC's March transactions that will utilize this servicing strategy.

Under GMAC-RFC's previous pooling and servicing documents, GMAC-RFC was able to modify the interest rate or term of any mortgage loan that is in default or foreseeable default. Under the revised PSA agreements, GMAC-RFC, through Homecomings, will now allow certain borrowers to capitalize unpaid interest and certain foreclosure costs by re-amortizing these amounts over the term of the loan.

This capitalization modification may be done only once during the life of the loan. It will not allow for the creation of a balloon loan by adding delinquent interest and foreclosure costs on the last payment date of the ...