Secondary Subprime Hearings

WASHINGTON, D.C., For the second time in weeks, Congress has delved into the role the secondary market plays in subprime lending.A panel made up of Wells Fargo, a subprime servicing company, a credit rating agency and a non-profit research group debated loan modifications, assignee liability, moratoriums and servicer-imposed delays in foreclosure Tuesday before Capitol Hill lawmakers.

Cara Heiden and Warren Kornfeld (left and center)

Cara Heiden, division president of Wells Fargo Home Mortgage, told the House financial services subcommittee about the company’s underwriting and lending practices, explaining that Wells only approves loan applications if the borrow has the ability to repay the loan, that it does not make pay option ARMs or negative amortization loans and said Wells limits prepayment fees to the lesser of three years or the fixed term of an adjustable rate loan.Heiden said the California-based company is presently working with investors to develop more options such as greater flexibility in loan modification and customer loan workouts to assist customers facing difficult adjustable-rate resets.

Wells says it is the only bank in the United States to have the highest credit rating from both Moody’s and Standard & Poor’s Rating Services.

Moody’s Investors Service Team Managing Director Warren Kornfeld told the representatives that the rating agency believes “judicious” use of loan modifications are an important tool for mitigating loan losses.

Michael Calhoun, president of the Center for Responsible Lending, a North Carolina-based non-profit research and policy organization that focuses on home ownership, told Capitol Hill he was heartened by Moody’s backing of the concept and described the venerable rating company’s support as a “major step.”

“We hope other rating agencies will follow suit and explore other ways they can encourage servicers and lenders to offer borrowers responsible loan modifications,” Calhoun said.

Larry B. Litton Jr., president and chief executive officer of Litton Loan Servicing, a Texas-based mortgage servicing company that services subprime and Alt-A loans, said his company also supports and offers loan modification.

“We strongly believe that providing loan modification options to consumers is the number one tool that we have available to deal with the impending issue of ARM resets,” he said, adding that Litton has used loan modifications for years.

“When done properly, modifications through payment deferrals, extensions of maturity date, waiving or capping arrearage and interest rate reductions provide the consumer with payment relief while reducing credit issues to the investors,” he said.

But Litton reminded that mortgage servicers are accountable to both consumers and investors.

He said his company uses several other strategies such as early contact with homeowners facing rate and payment resets and broadening relationships with third-party organizations and community groups to assist in communicating with borrowers who might need help with their mortgages.

Litton criticized a deferral strategy reportedly already used by several mortgage servicers. He said extension strategies mimic loan modification but actually defers dollars owed without changing the terms of the loan. He said the manufactured housing industry tried that tactic several years ago as a way to cure delinquent loans and caused both investors and homeowners to become “big losers.”

And unlike many others, Litton believes the current wave of defaults has little to do with ARM resets but rather with 2005 and 2006 originations that stemmed from lax underwriting, improper documentation and borrower fraud.

He warned that things could get worse. “The real impact of ARM resets will be seen in increasing defaults later this year and into 2008 as many borrowers experience payment increases associated with the upcoming rate increases on their ARM loans,” Little said.

To get in front of that next wave, Litton said servicers need more flexibility to modify loans that are current but are at risk of going into default. He explained that servicer ratings and language in pooling and servicing agreements related to mortgage-backed securities transactions restrict some servicers more than others when it comes to the ability to modify loans. He said all servicers should be given the flexibility to modify loans.

“Too often, servicers trying to act in the best interest of both the homeowner and the bondholder are hamstrung by legal, accounting and tax rules that prevent us from working with borrowers as thoroughly as we need to,” he said.

Litton also said subprime accounts should be required to establish escrows and rejected the idea of foreclosure moratoriums as bad for the industry and the economy. Instead, he said, servicers should do what Litton is already doing and adopt a two-week delay in the foreclosure process. The delay gives the servicer additional time to communicate available options to the borrower while giving the borrower additional time to explore their options, he said.

And, because borrowers are often more comfortable talking to community organizations about delinquencies, Litton said his company favors providing funding and support to the organizations to assist in efforts to reach homeowners.

CRL’s Calhoun told the politicians that families will be able to keep their loans if the secondary market is required to self-police the loans it buys.

Calhoun said subprime mortgage lending problems can be tamed with the adoption of assignee liability — a concept that imposes liability on purchasers or assignees of mortgage loans — so borrowers can purse legal claims against assignees for loans that involve illegal action or abusive terms.

“Assignee liability would help ensure that when investors accept mortgages, with all the corresponding financial benefits, that they also accept reasonable liability for when the mortgages prove to be abusive and harm homeowners,” Calhoun told Congress.

But Donald C. Lampe, an attorney with North Carolina-based law firm, Womble Carlyle Sandridge & Rice, said assignee liability could shut down the national secondary market as happened in Georgia when that state imposed unlimited liability on anyone who made or took assignment of a home loan. The Georgia General Assembly acted quickly to amend state law and restore the mortgage market.

Donald C. Lampe and Larry B. Litton Jr. (left and center)

Congresswoman Carolyn Maloney (D-NY), chair of the financial institutions subcommittee, pointed out that while other states have pioneered assignee liability protections that have good results, the Georgia “fiasco” demonstrates what happens when one state goes too far. Late last month, the Senate securities subcommittee also held a hearing on the topic. Both sessions are part of a handful of Congressional hearings held in several weeks on subprime mortgage lending. Rep. Maloney said the hearings should make clear that Congress is not waiting for the private sector to do what it thinks is right to solve “this rapidly growing crisis.”

Related:

Servicer Options Often Inhibited WASHINGTON, D.C. — Credit rating agencies and law professors testified to Congress last week about the subprime meltdown, the secondary market’s role in the fiasco and recommended servicer actions.

Fannie, Freddie Target Subprime Refis WASHINGTON, D.C. — Fannie Mae and Freddie Mac are rolling out subprime programs for borrowers facing foreclosure. Chief executive officers of the two government sponsored housing enterprises joined regulators and consumer groups in testimony to Congress Tuesday on rising foreclosures.

Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at: [email protected]