Several studies warn of dire consequences if pending cramdown legislation becomes law. The mortgage plan detailed last week by the Obama administration, which included government-subsidized modifications, has found plenty of friends and foes alike. Among those who can reportedly benefit from the plan are illegal immigrants and borrowers who committed mortgage fraud.
The Mortgage Bankers Association issued a six-page letter to Treasury Secretary Timothy Geithner and HUD Secretary Shaun Donovan asking that mortgage industry input be considered in developing a loan modification policy. In addition, the trade group joined a coalition of housing, financial industry and business groups in a letter to House Speaker Nancy Pelosi and House GOP leader John Boehner opposing cramdown legislation.
But the letters apparently fell on deaf ears, with the House approving cramdown legislation last week.
In a residential mortgage-backed securities newsletter, Bank of America Corp. said the cramdown legislation is designed to provide delinquent borrowers with more leverage in negotiating with their servicers. BoA noted that hungry bankruptcy lawyers will ensure the volume of bankruptcy filings spikes.
BoA also noted the legislation, which will be used to punish servicers, would impact how different RMBS tranches get hit with losses.
“This makes the jumbo and high quality alt-A sectors, which have a very high percentage of deals based on a shifting interest structure, more vulnerable to this legislation,” BoA said. “The upshot is that the cramdown legislation could deal a serious blow to the prime non-agency market, shake investor confidence, and lead to more bailouts.”
Barclays Capital has issued a report indicating that losses from bankruptcy cramdowns could be “significantly larger” than servicer-driver modifications and that bankruptcy filings would double if Congress allows the cramdowns.
“We fear a massive sell-off that would worsen valuations, threatening further balance sheet write-downs,” Barclays said in the report.
Standard & Poor’s Rating Services is warning in a report that cramdown legislation may affect the allocation of losses in RMBS transactions. S&P said the bankruptcy losses in RMBS could become larger than the bankruptcy “carve-outs” that issuers typically structure into the transactions and that some securities may fail to fully pay down before maturity if the legislation permits the terms to extend beyond the maturity date.
But bankruptcy lawyers welcome the administration’s plan to modify home mortgages.
The National Association of Consumer Bankruptcy Attorneys said in a statement that it welcomes the administration’s “support for changes to existing bankruptcy laws that will allow for judicial modifications of home mortgages.”
The association also wants Congress to freeze foreclosures “until the Obama housing plan, including and in particular bankruptcy reform, has been fully implemented.”
George Mason University law professor Todd Zywicki, however, argues that while modification will provide a “windfall” for some borrowers, it will increase mortgage costs overall.
“If bankruptcy judges can rewrite mortgage loans after they are made, it will increase the risk of mortgage lending,” Zywicki wrote in the Wall Street Journal. “Increased risk increases the overall cost of lending, which in turn will require future borrowers to pay higher interest rates and upfront costs.”
Friends and foes alike have emerged on the Homeowner Affordability and Stability Plan announced last week by the Obama administration.
Amherst Securities Group finds some problems with the administration’s plan in a new report.
Amherst claims the plan is “quite problematic” because, among other reasons, the largest benefit goes to those to stretched or even “lied” to buy a house; the holder of the second mortgage is not forced to participate; conflicts between servicer and investors are “acute”; and it is not known how long the program will take to implement.
One aspect of Obama’s mortgage plan, compensating servicers for modifications completed, was advocated by three Columbia Business and Law school professors. In a report Christopher Mayer, Edward Morrison and Tomasz Piskorski say services that modify mortgages should be received increased fees with federal TARP funds. They also argue that the government should enact legislation that modifies existing securitization contracts.
Taking those steps would prevent nearly 1 million foreclosures and save nearly $11 billion, they said.
Among companies to issue endorsements of the mortgage plan were Just Price Solutions and Neighborhood Housing Services of America, which facilitate financing for low-income housing; and US Mortgage Mod, LLC Of Philadelphia.
Private equity investor Wilbur Ross, CEO of WL Ross & Co., is calling for a safe harbor provision in federal legislation so that servicers are not sued when complying with modification formulas.
“Securitization documents were not drafted in a way that contemplated wholesale modifications because at the time no one seemed to visualize the problems that have developed,” Ross said in a blog statement. “Servicers have requested enactment of a safe harbor provision so that complying with the modification formulas do not result in liability.”
In its RMBS report, BoA noted that loan modification data is “far from perfect”.
“Even if servicers report loan modification data, the reporting practices and the presentation of the information in a common template — is varied, making it difficult to use the little information available to carry out a thorough and conclusive study,” the company says in a report on residential mortgage-backed securities.
Federal Housing Finance Agency Chief Economist Patrick J. Lawler testified last month before the House Financial Services Committee that Fannie Mae and Freddie Mac modified a monthly average of 5,311 loans year-to-date November 2008, up from an average of 2,884 in 2007.
FDIC Chairwoman Sheila Bair recently told the National Association of Attorneys General that many of the loan modifications being touted by servicers are nothing more than recapitalization of past-due principal and interest that only increase the payment but don’t provide “meaningful payment reduction to an affordable level.”
Bair also noted that “loan mod scams” have recently surfaced.
The National Loan Modification Association of America has been officially launched to help the rapidly growing industry police itself, an announcement last month said. The group hopes its seal of approval will help borrowers avoid bad modification companies.
Wall Street and Associates COO Natalie Eger offered in a statement advice about avoiding loan modification scams.
“Beware of companies who guarantee specific rates or balance reductions,” Eger said. “Many of these fraudulent companies claim that they can guarantee the client a specific saving or interest rate and this is absolutely a lie.”
LoanModDVD.com recently touted how its $99 DVD provides borrowers with step-by-step instructions and all the necessary forms needed to apply for a loan modification.
A similar product offered by America 1st Support Services claims to be a low-cost aid to modifications.
A new resource center was launched by Lawyer Central for delinquent borrowers who want to know more about loan modifications.
An investigation by the Colorado Division of Real Estate of four loan-modification companies has been closed because no evidence of breaking the state’s mortgage-broker was found.
In a statement, regulators identified the “exonerated” companies as Creative Real Estate and Finance Inc. of Englewood, CO and three California firms: MitigationOnlineConsultants.com, Carlsbad Real Estate Group LLC and J&J Lending Corp.
SaveMyHomeUSA is recruiting loan modification processors to help illegal aliens — which it says are eligible for government-subsidized loan modifications under Obama’s plan. The company, which says it processes more than 1,000 modifications monthly, pays $600 per modification.
“You do not need a license or a certification to become a partner in this program,” SaveMyHomeUSA said.
