The Bush administration’s latest plan to prevent foreclosures — persuading lenders to freeze the introductory interest rates on some adjustable-rate mortgages — remains a work in progress, as disagreements remain over who will be eligible for streamlined loan modifications and refinancings, Treasury Secretary Henry Paulson said today.
The plan envisions members of an administration-backed HOPE NOW coalition — including mortgage servicers, counselors and investors — will work together to contact borrowers facing interest rate resets, and provide relief for many who are facing foreclosure.
Paulson said that since forming in October, members of the HOPE NOW coalition have achieved a goal of contacting borrowers 120 days in advance of a mortgage reset.
Some borrowers facing interest rate resets may be able to avoid higher monthly payments by refinancing into a new loan. The current negotiations are focused on how to help borrowers who don’t qualify for a new loan, but who have steady incomes and clean payment histories and can continue making their current monthly payments.
The administration wants lenders to freeze the “teaser” rates on large numbers of adjustable-rate mortgage (ARM) loans, if the borrowers holding those loans would otherwise end up in foreclosure.
The idea of conducting wholesale loan modifications was proposed in early October by Federal Deposit Insurance Corporation chief Sheila Bair. Bair cited a report by Moody’s Investor Services that loan servicers had modified less than 1 percent of troubled subprime loans as evidence that lenders weren’t moving fast enough to prevent foreclosures.
Paulson said the Treasury Department is working with the American Securitization Forum to persuade loan servicers and investors to develop categories of borrowers eligible for loan modifications and refinancings. The hope, Paulson said in prepared remarks at a National Housing Forum organized by the Office of Thrift Supervision, is that “what was a fragmented, cumbersome process can be a coordinated effort which more quickly helps able homeowners.”
But the “diffuse nature” of the markets that provide the financing for mortgage loans means the process of refinancing and modifying loan terms “can be more difficult than it would seem,” Paulson said.
“The company collecting your mortgage payment every month is most often doing that on behalf of those who own the mortgage, and they are limited in the decisions they can make on behalf of those ultimate owners, who are spread all over the world,” the Treasury Secretary said.
The negotiations will take time, Paulson said, “as all parties seek to define categories of borrowers for streamlined refinance and modification where that is in the best interest of both the borrower and the mortgage investor.”
Paulson said he was “confident they will finalize these standards soon. And I expect all servicers will implement them quickly, and create benchmarks to measure their progress along the way.”
Executives with Countrywide Financial Corp., Washington Mutual Inc. and Fannie Mae attending today’s forum expressed support for the plan, the Wall Street Journal reported.
Testifying before a House subcommittee Friday, a spokesman for the American Securitization Forum (ASF) said that mortgage servicers, pension funds, mutual funds and hedge funds all seek to prevent foreclosures, because it is often “the costliest outcome for both the borrower as well as the investor.”
ASF Deputy Executive Director Tom Deutsch said streamlining the process of evaluating borrowers and matching them with the appropriate loss mitigation options, “will ultimately help servicers manage their responsibilities in a changing market, while appropriately balancing the interests of borrowers and investors.”
It remains to be seen, however, how willing investors in mortgage-backed securities will be to step back from the position the ASF took in June against wholesale loan modifications.
“Loan modifications should be considered and made on a loan-by-loan basis, taking into account the unique combination of circumstances for each loan and borrower, including the borrower’s current ability to pay,” the group said in a policy statement at the time. “The ASF is opposed to any across-the-board approach to loan modifications, and to any approach that would have all modifications structured in a particular manner.”
The group said it was also opposed to “any proposals that would provide an across-the-board moratorium or delay period on foreclosures.”
In a letter to Paulson, New York Democrat Sen. Hillary Clinton said that any agreement should impose a 90-day moratorium on foreclosures, and freeze monthly rates on subprime ARMs for at least five years or until they are converted into fixed-rate loans. A copy of the letter was posted on the official Web site of Clinton’s presidential campaign.
Because securities backed by mortgage loans have different levels of risk, or “tranches,” loan servicers may be reluctant to engage in loss mitigation because of fears of lawsuits by disgruntled investors, said Tara Twomey, a lecturer at Stanford Law School, at Friday’s hearing by the House Financial Services Subcommittee on Housing and Community Opportunity.
Testifying on behalf of the National Consumer Law Center, Twomey said “tranche warfare” is one of several potential hurdles in conducting loan modifications, including constraints in pooling and servicing agreements that govern mortgage-backed securities.
The only way to ensure that loan modifications happen on the scale necessary to address coming waves of foreclosures, Twomey said, is for Congress to require that servicers engage in “reasonable loss mitigation” prior to foreclosure.
“Given hurdles in even achieving minimal concessions on loan modifications, it is unlikely that servicers and holders will fix the wrongs perpetrated on vulnerable homeowners across the nation without a requirement to do so,” Twomey said in her prepared remarks.
Although interest rate resets pose “a substantial hurdle for many borrowers,” others will need more than a temporary or permanent interest rate freeze, Twomey testified.
She cited the case of Jennie Haliburton, a 77-year-old Philadelphia homeowner whose “discounted rate” on a 2/28 ARM loan from Countrywide Home Mortgage was 9.625 percent. Although the loan payment is not scheduled to adjust until May, 2008, Haliburton’s loan payment, taxes and insurance are already consuming 62 percent of her Social Security check, Twomey said.
“A loan modification strategy that will work for Ms. Halliburton, and those like her, will take more than temporary or even permanent freezes on adjustable rates,” Twomey testified. “Borrowers like her need interest rate reductions and principal reductions in order to restore long-term stability.”
She recommended a two-step process, in which automatic loan modifications are made to certain classes of loans where borrowers are eligible, followed by “a variety of case-by-case measures.”
As envisioned by Twomey, automatic loan modifications would include converting ARM loans to fixed-rate loans at the teaser rate, or the fully-indexed rate, whichever is lower. Twomey also advocates write-downs of fixed-rate loans to the par rate, or principal reductions to present market value.
After that, case-by-case assistance should include a stay on foreclosure while the servicer reviews the borrower’s long-term financial situation and offers a repayment plan, forbearance, loan modification or other options to bring the loan current, Twomey said.
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