Despite Lender Rhetoric, Modifications to Date Have Been Limited

 Paul Leonard, California Office Director for the Center for Responsible Lending in recent testimony said;

Despite Lender Rhetoric, Modifications to Date Have Been Limited

For months now, many large servicers have been trumpeting their efforts to contact borrowers facing resets early and to offer aggressive loan modifications. To date, however, the reality of results has not matched the rhetoric. According to a recent survey by Moody’s, less than one percent of borrowers with subprime ARMs were receiving loan modifications at the time when their mortgage payments reset. [Jeanne Sahadi, CNN Money. “Subprime: Big talk, little help.” September 26, 2007. ] The housing counselors, community groups and consumer lawyers we hear from tell us that, in the vast majority of cases, modifications are not happening. [See, e.g., Carolyn Said, “Modified mortgages: Lenders talking, then balking,” San Francisco Chronicle, September 13, 2007.] Additionally, California Reinvestment Coalition recently surveyed 33 of the states’ 80 housing counseling agencies and reported that few long-term affordable modifications were being offered. [The Chasm Between Words and Deeds: Lenders Not Modifying Loans as They Say To Avoid Foreclosures. California Reinvestment Coalition, October 2007.]

Yes, there has been a lot of lip service lately in the media by lenders and servicers in regards to loan modifications.

Anyone involved on the front lines of the foreclosure crisis will tell you that it is like pulling teeth. Trying to work with lenders and servicers for a loan workout or short sale for a borrower in need of assistance is one of the most frustrating experiences that “ANYONE” will ever go through.

Many homeowners that do reach out and obtain a loan modification, receive unfavorable terms for long term affordability.

I have seen this happen often on the loan modifications that I have been involved in or where a homeowners have had me review their loan modification agreements. Many times the homeowers were told it would be fixed for 30 years and they recieve their loan modification agreements that they do not understand because they are unclear. They then are pressured with unrealistic time frames and due dates to get their paperwork back to the lender.

 It all reminds me of the Soup Nazi in the Seinfeld episodes, “You, to the end of the line, no loan modification for you!”

More from Mr. Leonard;

We also are hearing that even in the minority of cases where modifications are offered, they are limited to a one-year or even a six-month extension of the introductory interest rate, a modification that is too short-term to allow a family to engage in meaningful planning for their financing, housing and children’s schooling. Any sustainable, meaningful loan modifications would ideally last for the life of the loan, but certainly no shorter than five years.

Another HUGE issue that I have observed and Paul Leonard covered in his testimony is that there are no rules, policies and procedures governing the loan modification process.

One must need a crystal ball to understand what their lender eligibility requirements are. One borrower can obtain a loan modification from their lender, while an identical borrower X’s a 1000 will not receive any relief and will eventually lose their home.

Almost like Tuesday Night Bingo or Saturday Night Lotto, but with your house.

A related and critical concern is that different borrowers will be treated differently (for example, those who cannot afford legal representation may be at a distinct disadvantage and may not be offered the same, or any, options). One need is to standardize the loan modification process to ensure fairness and efficiency.

Paul Leonard gives some great testimony on “why” lenders and servicers are resistant to being more pro active with their loss mitigation efforts and I agree 110% with him.

There are a number of potential reasons to explain the failure to provide modifications despite their basic economic appeal. These include:

Misaligned financial incentives:It appears that despite the larger economic savings from modifications, servicers may get paid more for a foreclosure than for doing a loan modification. A Deutsche Bank Securities official recently was quoted: “Servicers are generally dis-incented [sic] to do loan modifications because they don’t get paid for them, but they do get paid for foreclosures.” This official went on to indicate that it costs servicers between $750 and $1,000 to complete a loan modification. [Quote from Karen Weaver, managing director and global head of securitization research at Deutsche Bank Securities. “Subprime Debt Outstanding Falls, Servicers Pushed on Loan Mods,” Inside B&C Lending, November 16, 2007 p. 3. ]

• This theory has been bolstered recently, as John Reich, head of OTS, has called for $500 payments to servicers for each loan modification.

• Servicers are overwhelmed. The magnitude of the crisis has simply been too much for many servicing operations to respond effectively at the individual level, even when managers support modifications. Hundreds of thousands of borrowers are asking for relief from organizations that have traditionally had a collections mentality, have been increasingly automated, and whose workers are simply not equipped to handle case-by-case negotiations.

• Fear of investor lawsuits. The servicer has obligations to the investors who have purchased the mortgage-backed securities through pooling and servicing contracts, but there are conflicting interests among the different levels of investors. Servicers are hesitant to modify the loans because they are concerned that it will impact different tranches of the security differently, and thereby raise the risk of investor lawsuits when one or more tranche inevitably loses income. This phenomenon is known as “tranche warfare.” For example, a modification that defers loss will favor the residual holder if the excess yield account is released, but will hurt senior bondholders. Servicers see foreclosure as the safest course legally.

Piggyback seconds. The most intractable problem is the fact that one-third to one half of 2006 subprime borrowers took out piggyback second mortgages on their home at the same time as they took out their first mortgage. [Credit Suisse, Mortgage Liquidity du Jour: Underestimated No More, March 12, 2007, p. 5.]

• In these cases, the holder of the first mortgage has no incentive to provide modifications that would free up borrower resources to make payments on the second mortgage. At the same time, the holder of the second mortgage has no incentive to support an effective modification, which would likely cause it to face a 100% loss. The holder of the second is better off waiting to see if a borrower can make a few payments before foreclosure. Beyond the inherent economic conflict, dealing with two servicers is a negotiating challenge that most borrowers cannot surmount.

Now, my question to our government is, “How are we going to get through these issues and stop this lender rhetoric?”

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