Lenders Start to Sound Serious About Mortgage Modifications as They Fight Bankruptcy Cramdown Law
Several mortgage restructuring programs are beginning to emerge in the wake of the new Obama Administration housing initiative. Fannie Mae says it is working closely with the Neighborhood Assistance Corporation of America to establish a pilot mortgage restructuring program for distressed borrowers, according to the now-nationalized bundler of residential mortgages. The program involves restructuring mortgages to achieve an affordable payment. Neighborhood Assistance says it is a non-profit, community advocacy and homeownership organization.
About 478,000 Wachovia, including those with pick-a-pay loans, will be eligible for a streamlined modification program launched this week by Wells Fargo Home Mortgage, Wachovia’s acquirer. Eligible borrowers primarily include those who are delinquent or are likely to become delinquent. The possible modifications include extended terms, interest-rate reductions and temporary interest abatements.
Fifth Third Bancorp., which reported a $2.1 billion fourth-quarter loss, said in its earnings report that it had modified $218 million in loans during the period. Restructured loans stood at $574 million on Dec. 31.
Fitch Ratings recently released a report indicating proposed bankruptcy cramdown legislation would probably not trigger immediate downgrades to residential mortgage-backed securities if it were passed. But Fitch noted the devil is in the details and it will issue a more conclusive statement once the final terms are hashed out.
Nearly one-third of Fitch-rated prime and Alt-A RMBS — where bankruptcy losses are not allocated as typical credit losses and cramdown risks are amplified — are more likely to face senior bond downgrades. Those deals, which have balances totaling $223 billion, are subject to carve-out provisions. Risk is more limited on over two-thirds of prime and Alt-A securitizations.
Several mortgage-related trade groups — including the American Bankers Association, the Consumer Mortgage Coalition and the Mortgage Bankers Association — sent a joint letter last week to U.S. House Representatives John Conyers and Lamar Smith opposing bankruptcy cramdown legislation. They cited H.R. 200 and H.R. 225, which would benefit mortgage fraud participants.
“The housing market is already contracting and enactment of cramdown legislation would make things even worse by injecting more risk into the mortgage market, making it harder and more costly for people to buy and sell homes,” the letter said. “Permitting cram down in bankruptcy would encourage many people to file for bankruptcy first and would undermine other efforts to work-out or modify troubled loans.
Meanwhile, the so-called MFI-Mod Squad was launched last week to expose illegal loan-modification firms and their operators, a statement last week said. Delinquent borrowers can find comments about scam companies on MFI’s Web site, while they can also obtain help investigating unscrupulous loan modification companies.
An alliance was announced this week between MFI parent MFI-Miami and the modification firm Loan Solutions. MFI-Miami will perform forensic loan audits to exploit mistakes by mortgage lenders so Loan Solutions can leverage the compliance errors to obtain better modification terms on behalf of borrowers.
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