There is no question that sub-prime and Alt-A mortgages are headed for substantial modification this coming year. There are, however, vastly differing opinions about: 1) whether loan modification is a good idea and 2) whether loan modification rewards those who were not diligent with regard to household debt. The numbers are staggering (as are all numbers I have been writing about over the past few months). The feds proposed to bring 1/2 a Trillion dollars to the table for modification and, just this week, JPMorgan Chases announced it own 70bn mortgage modifcation plan. But, are these plans fair to the taxpayer? One author, Peter Viles, writes in opposition to loan modifications: “It runs against the streak of basic fairness in a lot of Americans. You're going to provide a handout to the fool.” LA Blog, LATimes, Nov. 1, 2008.
Here, then, are some opposing view points on federally sponsored Loan Modification – Post Bailout and Post the Mortgage Banking Industry Collapse.
POINT:
FDIC and US Treasury Prepare $500 Billion Loan Modification Plan
Posted by Moe Bedard On October - 29 – 2008. http://loanworkout.org/
The FDIC and the US treasury are contemplating using around $50 billion from the recently passed bailout of the financial industry bailout to guarantee about $500 billion in mortgages. The "tentative" plan could include loan modifications that would lower interest rates for a five-year period according to Bloomberg.
The program would be run by Sheila Bair and the Federal Deposit Insurance Corp. and could potentially guarantee around 3 million home mortgages. The plan had been scheduled to be announced Wednesday but was delayed because the details were still being finalized.
The new plan would dwarf past attempts by the administration to curb foreclosures and will be the most aggressive effort yet to limit further damage to Main Street. A loan modification plan that Sheila Bair, Chairwoman for the FDIC has been advocating for over a year and she may just get her wish.
The program, which could potentially help several million homeowners either refinance or modify their current mortgages into affordable loans, would require lenders to restructure mortgages based on a borrower's ability to repay. The plan is said to give homeowners 5 years of fixed, lower monthly payments before they can reset again.
In the past, the Bush administration had relied mainly on a voluntary efforts of lenders and mortgage servicers to assist struggling homeowners with long term affordable loan modifications to stem the foreclosure tsunami hitting our nation.
Recently, FDIC Chairwoman Sheila Bair publicly criticized the administration for doing to little to help Main Street. It appears that her comments have not fallen on deaf ears.
Today Bair discussed the program at an international deposit insurers conference in Arlington, Virginia, without offering details. "A framework is needed to modify loans on a scale large enough to have a major impact,"' Bair said.
The new FDIC and Treasury program would provide incentives to lenders and mortgage servicers to offer long term affordable loan modifications.
The government is also considering guaranteeing second mortgages, such as a home-equity lines of credit (HELOC), to assure investors they wouldn't take losses when the loan were modified. Sources say a guarantee in effect would put
taxpayers on the hook for the loan if borrowers default.
Just this past week the FDIC was actively searching for a large commercial building in Orange County, California to house potentially thousands of employees who's jobs will consist of reworking toxic mortgages for homeowners.
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COUNTERPOINT:
The unfairness of government-backed mortgage modifications
LA BLOG from the LA Time 11 01 2008
The L.A. Times today leads the newspaper with a look at Countrywide's plan to modify up to 395,000 mortgages -- 125,000 in California -- to make the mortgages affordable to buyers who are living in houses they otherwise can't afford. In some cases, those modifications will result in borrowers paying just 2.5% interest on their mortgages.
The Federal government took action last summer to encourage mortgage modifications by putting government guarantees behind the new mortgages, but for whatever reason that program doesn't appear to be attractive enough to banks. Pimco's Paul McCulley accurately described the basic unfairness of that effort months ago:
It runs against the streak of basic fairness in a lot of Americans. You're going to provide a handout to the fool. The fool is going to be rewarded and I, the taxpayer, will be put at risk at the margin for that handout to the fool. When all I did was exactly what I was supposed to do. Where is the fairness here?
It's a hard question to answer.
I've long believed mortgage modifications should be between the lender and the borrower. The lender should be free to do whatever it wants to maximize the value of the loan. If that means foreclosure, foreclose. If that means a generous workout that is ultimately better for the bank than foreclosure, then work it out. On the surface, Bank of America says that is what's happening here: it will modify loans if modifciation makes sense for the bank:
Not every borrower will qualify. One reason, said Bank of America executive Steve Bailey, is that the loan owner's expected earnings on a modified loan must exceed what it would expect to recover in foreclosure.
The Federal government, through the FDIC, has announced an aggressive effort to modify loans serviced by IndyMac, the failed bank. But as the indispensable Tanta reported yesterday at Calculated Risk, that ambitious program is off to a slow start. Tanta reports the FDIC originally said it thought it could save up to 40,000 out of 60,000 troubled IndyMac mortgages, but to date has only reached out to 15,000 borrowers, and has modified only 3,500 mortgages.
-- Peter Viles
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How the IndyMac Federal Loan Modification will Operated
Loan Modification Program for Distressed Indymac Mortgage Loans
IndyMac Federal Bank, FSB ("Indymac Federal") will implement a new program to systematically modify troubled mortgages. The program is designed to achieve affordable and sustainable mortgage payments for borrowers and increase the value of distressed mortgages by rehabilitating them into performing loans. This in turn will maximize value for the FDIC, as well as improve returns to the creditors of the former IndyMac Bank and to investors in those mortgages. The new program will help IndyMac Federal improve its mortgage portfolio and servicing by modifying troubled mortgages, where appropriate, into performing mortgages.
Below are some questions and answers regarding the program:
What loans are eligible?
What is the timeline for rollout of offers?
How will you determine which loans receive modification proposals first?
What modification options will be available to borrowers?
How does the IndyMac Federal determine whether the modified mortgage is affordable to the borrower?
How do borrowers apply for the program?
Where should borrowers interested in the program call to apply?
What loans are eligible?
The streamlined loan modifications will be available for most borrowers who have a first mortgage owned or securitized and serviced by IndyMac Federal where the borrower is seriously delinquent or in default. IndyMac Federal also will seek to work with others who are unable to pay their mortgages due to payment resets or changes in the borrowers' repayment capacities. This streamlined approach applies only to mortgages for the borrower's primary residence. As with all modifications, borrowers will have to demonstrate their financial hardship by documenting their income.
The goal of this streamlined loan modification program is to achieve improved value for IndyMac Federal by turning troubled loans into performing loans and, thereby, avoiding unnecessary and costly foreclosures. Accomplishing this goal will reduce the costs to the FDIC of the failure of IndyMac Bank and provide improved returns to investors in securitized mortgages.
Some mortgages serviced by IndyMac Federal are subject to additional contractual terms governing loan modifications. While additional steps are necessary to comply with those contracts, IndyMac Federal will work to expedite approvals for modifications to help eligible homeowners keep their homes.
IndyMac Federal will only make modification offers to borrowers where doing so will achieve an improved value for IndyMac Federal or for investors in securitized or whole loans. Modification offers will be provided consistent with agreements governing servicing for loans serviced by IndyMac Federal for others. The modification program does not guarantee a modification offer for IndyMac Federal borrowers.
What is the timeline for rollout of offers?
Proposed modification terms already are being sent to IndyMac Federal borrowers based on information provided by the borrowers. Several thousand modification offers will be sent by the end of this week and we will continue to reach out to many more distressed borrowers in the coming weeks. Once the borrower signs the agreement and sends a check for their new mortgage payment, along with the information necessary to verify income, IndyMac Federal will promptly finalize the modification once it verifies that the borrower's income matches the specific modification offer. Borrowers who have not been contacted by IndyMac Federal with a modification offer, but who are experiencing financial hardship and are falling behind on their mortgage payments should contact the bank to inquire whether they may be eligible for a loan modification that could help them keep their home.
How will you determine which loans receive modification proposals first?
IndyMac Federal is focusing on mortgages that are now seriously delinquent or in default in order to prevent further losses on those mortgages and to avoid unnecessary and costly foreclosures. Borrowers who have not been contacted by IndyMac Federal with a modification offer, but who are experiencing financial hardship and are falling behind on their mortgage payments should contact the bank to inquire whether they may be eligible for a loan modification that could help them keep their home.
What modification options will be available to borrowers?
Under the IndyMac Federal program, eligible mortgages would be modified into sustainable mortgages permanently capped at the current Freddie Mac survey rate for conforming mortgages (now about 6.5%). Modifications would be designed to achieve sustainable payments at a 38 percent debt-to-income (DTI) ratio of principal, interest, taxes and insurance. To reach this metric for affordable payments, modifications could adopt a combination of interest rate reductions, extended amortization, and principal forbearance.
If, consistent with maximizing the net present value of the mortgage, an interest rate reduction below the current Freddie Mac survey rate is necessary to achieve a 38% DTI, then IndyMac Federal could reduce the rate further for five years. After five years, the interest rate would increase by no more than 1% per year until it capped at the Freddie Mac survey rate where it would remain for the balance of the loan term. Other modification features could be combined with an interest rate reduction, as necessary and consistent with maximizing the value of the mortgage, to achieve sustainable payments.
It is important to remember that there are no fees or other charges for this modification. All unpaid late charges will be waived.
How does IndyMac Federal determine whether the modified mortgage is affordable to the borrower?
IndyMac Federal determines whether a modification proposal is affordable based on income information received from the borrower. Modifications would be designed to achieve sustainable payments at a 38 percent housing debt-to-income (DTI) ratio of principal, interest, taxes and insurance. To reach this metric for affordable payments, modifications could adopt a combination of interest rate reductions, extended amortization, and/or principal forbearance.
How do borrowers apply for the program?
Thousands of delinquent borrowers will be receiving proposed offers for a loan modification in the coming weeks. These offers are based on current income information provided by the borrowers. Borrowers also may call 1-800-781-7399 to talk with an IndyMac Federal customer service specialist and find out if they may qualify for a loan modification under this program or alternatives that may help them keep their home. Once a borrower has provided financial information to an IndyMac Federal customer service representative, IndyMac Federal will evaluate whether a loan modification may be available and, if so, provide a proposed offer to the borrower by mail.
Once a borrower has received a proposed modification offer, all it takes for them to bring their mortgage current and qualify for a final modified mortgage is to
1. sign and return the enclosed Modification Agreement along with a check for their modified monthly mortgage payment and
2. provide verification of their income to confirm that they qualify for the proposed modification.
The borrower must then continue to make timely payments at the modified monthly payment amount and comply with all other terms of their mortgage agreements. If the borrower's verified income information demonstrates that they do not qualify for the proposed modification, IndyMac Federal will contact them to discuss alternatives that may help them keep their home.
Where should borrowers interested in the program call to apply?
Borrowers who are delinquent or who are experiencing financial hardship and are falling behind on their IndyMac Federal mortgage should call 1-800-781-7399 to speak with an IndyMac Federal customer service representative. They may also visit the FDIC website (www.fdic.gov) or the IndyMac Federal website (www.imb.com) to find out more about the loan modification program.
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Hugh Wood, Esq.
Wood & Meredith, LLP
3756 LaVista Road
Suite 250
Atlanta (Tucker), GA 30084
www.woodandmeredith.com
hwood@woodandmeredith.com
www.hughwood.blogspot.com
Phone: 404-633-4100
Fax: 404-633-0068
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