Modified twice, paid clean for 18 months: do you price that as performing or as re-performing?

Question

I've now looked at four notes where the pay history is spotless for a year and a half and the reason it's spotless is a modification that cut the payment. The seller's tape calls them performing. Every buyer I've talked to calls something else.

One camp says 18 months of clean payments on the current terms is exactly what performing means, and asking for more is just charging the borrower for something that already got fixed. The modification is evidence somebody solved a problem. The payment is now affordable, the borrower stayed, and you can see 18 data points proving it. Price it on the terms in force.

The other camp says a modified loan carries information the payment history hides. The borrower defaulted once. Redefault rates on modified loans are materially higher than on never-delinquent loans, so the same 18 months means less than it would on a loan with no history. That camp wants 24 months minimum, or a price closer to re-performing paper, which can be several points of UPB.

There's a third position I've heard, which is that the type of mod matters more than the seasoning. A rate reduction that put the payment inside a sane share of documented income is different from a capitalization mod that just moved the arrears onto the back of the loan and left the payment where it was. Under that view a 12 month rate-reduction mod prices better than a 30 month capitalization mod.

And the paperwork question sits across all of it, since an unrecorded mod is its own problem depending on the state.

What's the seasoning number you actually use, and does the mod type move it?

mikeoconnell7 · Answer

The mod type position is the one I'd vote for, and I'd add one thing to it. Did anybody document income when the mod was written, and is that documentation in the file? A rate reduction that landed the payment at 22% of verified income is a different asset from the same rate reduction written off a phone call in 2019.

jordan_ellis2 · Answer

Half a year of reading and I still can't find a defensible seasoning number, which makes me suspect the number is a proxy for something people can't measure directly. If redefault risk is what you're actually pricing, seasoning is a weak instrument for it.

tylerbrooks9 · Answer

I'd just skip them, which I realize is the boring vote. The whole reason notes appeal to me is that I don't want a project. A file with two mods, a redefault question and a recording question is a project wearing a coupon.

karen_whitfield · Answer

verity, that's a defensible position, but you're paying for it in yield. The reason modified paper trades at a discount is that other people vote the way you just did. If you only buy the cleanest files you'll compete with everyone else for them.

My own rule after years of long holds is that I care about the payment relative to what the borrower can actually pay, and 18 months is enough to see that in a mod that reduced the payment. A capitalization mod I'd treat as unresolved no matter how long it's been current, because nothing about the borrower's monthly math changed. So mod type, and then seasoning inside that.

Modified twice, paid clean for 18 months: do you price that as performing or as re-performing?

4 replies