GSE Loan Modification Plan Generates Questions, Concerns

The mortgage modification frenzy that has caught lenders in its net in recent weeks has moved to both Fannie Mae (FNM) and Freddie Mac (FRE), with both GSEs rolling out what’s being called a “streamlined modification plan” — or SMP — to restructure loans for troubled borrowers en masse. Or at least, that’s the hope. In a press conference Tuesday, Federal Housing Finance Agency director James Lockhart said the program would target high-risk borrowers — those 90 or more days delinquent on their mortgages — and employ various modification strategies to get borrowers down to an “affordable” mortgage payment, defined as 38 percent of a household’s monthly gross income on a first mortgage payment. To get there, Fannie and Freddie are authorizing their servicers to employ mortgage interest rate reductions, re-amortization of the loan over a longer payment horizon, or deferrment of principal payments, Lockhart said; servicers modifying loans under the program will recieve an $800 payment per loan modified. “The streamlined modification program complements existing loss mitigation programs,” said Lockhart. “We expect that it could significantly increase the number of modifications completed.” Could, but not will — an important difference. Borrowers will still need to work in good faith with servicers, and document their income; both represent significant hurdles for any traditional loss mitigation effort, sources suggested to HousingWire. Which means that — as is the case with similar programs rolled out by large servicing shops in recent weeks, including Countrywide, Chase, and Citi — it’s not yet clear how many borrowers this program will reach in the form of completed modifications. Treasury’s Neel Kashkari — let’s call him the TARP king, for now — essentially alluded to as much in his remarks. “The adoption of this streamlined modification framework is an additional tool that servicers will now have to help avoid preventable foreclosures,” he said. “This framework will not only help those homeowners who receive a streamlined modification, it will also further address servicer capacity concerns by freeing up resources, helping ensure that borrowers do not fall through the cracks because servicers aren’t able to get to them.” All of which is a good thing, although there is a bit of irony in the proposal; after all, the FDIC warned lenders on July 1 that blanket freezes of borrowers’ HELOCs was likely a violation of the Truth in Lending Act. Which now means lenders/servicers can apply blanket modifications to delinquent borrowers, but can’t take similar preventative actions to prevent a delinquency from hitting the books in the first place. No moratoriums Notably absent from the SMP plan rolled out Tuesday was a foreclosure moratorium, a feature that has been included in plans from other major servicers recently. Citigroup Inc. (C), for example, said Tuesday morning it would cease foreclosing on, or beginning foreclosures on, some of its borrowers as it looks to modify their loans. Key Democrats and consumer groups have been lobbying to see a moratorium put in place for Fannie and Freddie-guaranteed loans, now that both firms are under federal conservatorship with the FHFA. In the end, HW’s key sources wondered if the program was nothing more than window dressing. “Far too few people are thinking more than one move ahead when it comes to developments such as this,” said one source, a long-time industry observer, under condition of anonymity. “[Servicers are] gonna stop the foreclosure clock on people who are eligible for loan mods. Big whoop.” Another risk of such large-scale modifications, of course, is that they could incent performing borrowers to default in an effort to secure a lower payment on their own mortgage. But the larger issue, according to analyst Mark Hanson with Field Check Group, is that the modification plans being touted now don’t solve the underlying problem and merely forestalls future defaults. “The government’s new plan of reducing rates, extending terms and allowing negative amortization is done primarily from keep borrowers from walking and renting by competing with rentals,” he said in comments posted on his blog. “It does not solve the problem that home owners are hopelessly underwater and over-leveraged on their home. They can’t sell or refi.” It’s possible that Treasury and HOPE NOW officials are already aware of this limitation; Kashkari, after all, referred to working to stop “preventable” foreclosures. “The borrowers’ ultimate obligation to repay his or her current mortgage does not change,” Lockhart said in his statement, as well. Some sources were more blunt in their assessment of the plan. “They’re just asking people to stop paying on their mortgage for 90 days,” said a source, a banking analyst that commented on condition of anonymity. “Watch roll rates go through the roof.” See an HW op-ed on the issue of mass loan modifications and foreclosure moratoriums. Write to Paul Jackson at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.