B&C Accounts for 40% of Defaults.(bad credit mortgages)

NEW YORK -- Of the more than 2.6 million home loans that are currently overdue or in foreclosure, approximately 40% were made to subprime credit quality borrowers, according to DBRS and published reports.

"I think 40% was kind of eye opening for all in the industry," said Kathleen Tillwitz, a senior vice president at the rating agency who authored a recent report on the state of the subprime mortgage market. While 2.6 million home loans being overdue or in foreclosure "is a huge number," Ms. Tillwitz says the industry is taking steps to get the problem under control.

"I think in light of the subprime guidance and in light of the statement regarding prudent workout practices, we are going to see fewer loans going into foreclosure. Nobody wants to be the next Fairbanks, Household or Associates and get hit with a huge fine for not originating or servicing loans appropriately," Ms. Tillwitz told MSN.

Instead of focusing on timelines, servicers are now in a state of mind to avoid foreclosure wherever possible by keeping troubled borrowers in their homes, she said.

Servicers are limited by pooling and servicing agreements on the type and amount of modifications they can do on loans that have been securitized, but PSAs generally do allow for modifications. Historically, however, interpretations of what modifications can be done varied greatly from one servicer to another because of differing interpretations of what was allowed. Generally, most companies limited modifications to no more than 5% of a security in order to avoid violating the REMIC tax code.

The American Securitization Forum has circulated a proposal to clarify the definitions and interpretations so that everyone will be working on the same page when it comes to modifications and REMIC ...