Trade Groups Weigh In on Mortgage Rescue Plan

While mortgage-related trade groups appear to be mostly behind the Homeowner Affordability and Stability Plan, a number of issues need to be clarified.

A Feb. 23 letter from the Mortgage Bankers Association to Treasury Secretary Timothy F. Geithner and Housing and Urban Development Secretary Shaun Donovan indicated that one provision of the plan announced last week enables borrowers on loans owned or guaranteed by Freddie Mac and Fannie Mae with as-agreed payment histories and loan-to-values up to 105 percent to refinance without mortgage insurance. This feature is expected to help 4 million to 5 million borrowers refinance at today’s low rates — effectively modifying their loans.

But MBA is asking that the 105 percent LTV limitation be eliminated, raised or supplemented with another program for higher LTVs. The Washington, D.C.-based group noted that the 105 percent LTV limit would exclude the most needy borrowers in the hardest hit areas such as California, Florida and Nevada.

MBA suggested that a program for loans above 105 percent LTV be created where the government provides a second mortgage that keeps the first mortgage at 100 percent LTV. This program could be used for both agency loans and loans held in private-label securities.

A letter yesterday from the Consumer Mortgage Coalition to Geithner asked that the Treasury clarify a number of issues in its final release of the plan. Among questions raised were whether the borrower must prove if he or she unsuccessfully attempted to refinance; how “market rates” are determined; the depth of required underwriting, documentation and property valuation; and details about mortgage insurance coverage.

Another part of the plan involves $75 billion in government-subsidized loan modifications. MBA is asking that it be explicitly clarified that this aspect of the plan includes loans in high-cost areas up to the temporary conforming limit of $729,750. It is also requesting the ability for FHA, VA and RHS to be able to pay a partial claim for interest rate or principal modifications.

MBA is calling for a safe harbor to be established for servicers that protects them from the legal liability of modifying securitized mortgages. It also wants a FAS 140 provision to be suspended that could force issuers to take modified loans back on their books.

The mortgage banking group warned that the volume of refinances and modifications resulting from the plan will strain the industry and said it may be a slow process given the level of manual transactions that must be performed. It also highlighted how the lack of available warehouse financing is limiting capacity.

MBA reiterated its fierce opposition to mortgage cramdowns — which occur when a bankruptcy judge modifies mortgage terms. But it acknowledged the inevitability of forced modifications and called on the Treasury and HUD to ensure that judicial modifications are a last resort after all other options have been exhausted.

The Consumer Mortgage Coalition requested that “at risk of imminent default” be clarified. It also asked if newly credit card balances are considered expenses for purposes of qualifying, should lenders verify if payments were intentionally missed to qualify for a modification and whether fraud uncovered during the qualification process would disqualify a borrower for a modification. It also wants to know how its members should verify if a property is owner occupied.

Details about administering an incentive plan for modifications were additionally requested by the coalition. Other questions by the group dealt with more program specifics, procedures and definitions.

MBA requested that the government develop uniform guidelines for resolving troubled mortgages.

The American Bankers Association praised the plan when it was unveiled, noting that it “is a constructive, flexible and multifaceted initiative likely to have a positive effect on preventing mortgage foreclosures.”

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