Mortgage bankers say they can support the "conceptual underpinnings" of most of the Obama administration’s foreclosure prevention plan, but see lots of room for improvement.
Weak areas of the plan include an upper limit of 105 percent loan-to-value ratio for refinancings, and the program’s requirement that loans to be refinanced be owned or guaranteed by Fannie Mae or Freddie Mac, the Mortgage Bankers Association said in a letter to Treasury Secretary Tim Geithner and Housing Secretary Shaun Donovan.
While welcoming the plan’s goal of developing "clear and consistent guidelines for loan modifications," the MBA warned that there are legal and regulatory hurdles to applying the guidelines to FHA and VA loans.
In addition, loan servicers performing loan modifications need a "safe harbor" that protects them from lawsuits by investors in mortgage-backed securities, the MBA said. At the same time, the group said its members remain opposed to changing the bankruptcy code to allow judges to rewrite the terms of troubled borrowers’ loans, as proposed by the Obama administration.
The Obama administration hopes its plan will allow as many as 9 million families to restructure or refinance their mortgages. The plan provides incentives for loan servicers to make 3 million to 4 million loan modifications, and relies on Fannie Mae and Freddie Mac to take the lead in refinancing another 4 million to 5 million loans (see story).
The refinance plan is aimed at helping borrowers who made healthy down payments when taking out mortgages owned or guaranteed by Fannie and Freddie, but who now have less than 20 percent equity in their home because of declining home prices.
But the refinance plan won’t help borrowers whose loan-to-value ratio has ballooned past 105 percent, or whose loans aren’t owned or guaranteed by Fannie and Freddie, the MBA noted.
Unless the program’s 105 percent loan-to-value cap is lifted or raised, its effectiveness will be limited in areas hit hardest by falling prices, such as California, Nevada, Arizona, Florida, Ohio, Michigan and parts of the East Coast, the MBA said.
According to an analysis by listings and valuation site Zillow.com, about one in four homes with mortgages — 14 million residences — have loan-to-value ratios that exceed the program’s 105 percent loan-to-value cap (Many of those homes would not be eligible for the program even if the cap were eliminated, because their mortgages are not owned or guaranteed by Fannie or Freddie).
An alternative to easing the loan-to-value cap would be to refinance some borrowers into a 100 percent loan-to-value first mortgage, the MBA said, creating a second lien loan for the balance that could be purchased by the government. The government would have right of first repayment if a home were sold at a gain or the first mortgage refinanced, the group said.
The MBA also argues that otherwise eligible borrowers shouldn’t be excluded from the refinance program because their mortgages were pooled into private-label mortgage-backed securities, rather than purchased or guaranteed by Fannie or Freddie. Government assistance should be made available to borrowers based on "consistent, relevant factors," the group said, rather than circumstances over which borrowers have little say.
The Obama administration should also explicitly spell out that borrowers with "high-cost" conforming loans between $417,000 and $729,750 are eligible for refinancings, and the program should be expanded so that borrowers with even larger "jumbo" loans can take advantage of it, MBA said.
The conforming loan limit was established so that the liquidity Fannie and Freddie provide to mortgage markets would benefit low- and moderate- income borrowers, rather than the wealthy.
But in many parts of the country, "loans exceeding the conforming limit are a function of area housing costs rather than a borrower’s socioeconomic profile," the MBA said. The group warned that liquidity will not return to secondary mortgage markets "unless the crisis across the entire housing finance continuum is addressed."
FHA, VA loan mods
The Obama administration’s plan to help homeowners who are deeply "underwater" relies on loan modifications, rather than refinancing.
Under guidelines that are still being developed, participating lenders would have to reduce a loan’s interest rate to get monthly mortgage payments down to no more than 38 percent of a borrower’s income. The initiative would provide dollar-for-dollar matches for further interest-rate reductions, bringing mortgage payments down to 31 percent of a borrower’s income (see Treasury Department fact sheet).
The loan modification plan would provide $75 billion in subsidies, insurance and incentives for borrowers and lenders. Loan servicers could earn a $1,000 upfront fee for each loan modification, plus $1,000 a year for up to three years when borrowers stay current on their loans. Borrowers would also be eligible for incentive payments of up to $1,000 a year for five years.
The MBA sees merit in the Obama administration’s goal of establishing uniform industry guidelines for reworking existing mortgages to make them more affordable.
But when it comes to loans owned or guaranteed by the federal government — including Ginnie Mae, FHA, VA and the Department of Agriculture’s Rural Housing Service (RHS) — the MBA said loan servicers will face obstacles to modifications.
Instead of requiring loan servicers to buy loans out of Ginnie Mae securities in order to modify them, the government could allow servicers to "assign" the loans to FHA, VA and RHS, the group said. If modified loans are allowed to remain in Ginnie Mae loan pools, the agencies will also have to provide ongoing payments to make up for the reduced revenue, the MBA said.
The MBA says loan servicers will also need protection from lawsuits by investors in mortgage-backed securities if they are going to engage in loan modifications on the scale envisioned by the Obama administration.
Rep. Paul Kanjorski, D-Pa., has introduced legislation that would protect loan servicers entering into loan modifications, workouts and other loss mitigation plans with borrowers through Jan. 1, 2012.
Kanjorski’s bill, H.R. 788, would protect loan servicers making loan modifications when the anticipated recovery on the modified loan will exceed what could be obtained through a foreclosure.
Strain on capacity?
Even if lawmakers and regulators are sympathetic to the lending industry’s concerns, the MBA warned that the ambitious plan has the potential to strain its members’ capacity.
Millions of credit reports, income verifications and appraisals or broker price opinions will have to be processed, and current information on borrower income and debt will have to be entered into computer models by hand in order to determine debt-to-income ratios and loan-to-value ratios.
The group expects appraisers, title companies, closing agents and county recorders will also face capacity constraints, and that government and borrowers should have "realistic expectations of how quickly all of the loans eligible under the program can be identified and processed."
The Obama administration is also seeking a stick it can use to prod lenders and loan servicers into action — the threat of "cram-downs" of mortgage loans by bankruptcy judges.
The industry has opposed legislation to amend the bankruptcy code, saying that allowing judges to rewrite the terms of mortgage loans will raise the cost of borrowing for all homeowners.
The Obama administration is seeking "careful changes" to the bankruptcy code that would only allow modifications of existing mortgages taken out during the housing boom, but not new loans.
If the law is changed, the MBA said borrowers who have been offered a loan modification meeting the guidelines of the Obama administration’s new program should not be allowed to seek a cram-down in bankruptcy court.
Instead of reducing liens to a property’s fair market value, the MBA said bankruptcy judges should be limited to deferring the amount of loan principal that is beyond a property’s current value. That way, the group said, lenders would be able to recover amounts written down if the property recovers its value and is sold or refinanced.
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