If additional states - and potentially the federal government - follow in the footsteps of Ohio, financially stapped U.S. homeowners may have more options to refinance their mortgages. The state plans to issue municipal bonds in order to fund a mortgage refinance program for subprime borrowers, market participants said last week.
Such a plan was discussed on Capitol Hill last week as well as members of Congress - under increasing pressure to act on the matter of subprime lending - kicked around potential courses of action to aid borrowers currently in "predatory" loans. Talks also revolved around how to stop such loans in the future.
Others said that tax-dollar-funded bailout plans would be a hard sell, however. Ohio's plan could also be an anomaly, as the economically troubled rust belt state's homeowners have more than just predatory lending to worry about. "There is a lot of wood to chop before we have a real plan around," said Mark Adelson, head of structured finance research at Nomura Securities International.
Worsening performance and an increase in forbearances within loan pools is the most likely short-term effect home-equity investors can expect as lawmakers consider options, Adelson said. In fact, a majority of analysts are expecting subprime prepayment speeds to slow from last year, as options for borrowers to shift into another mortgage diminish amid tightening underwriting standards and slowing home-price appreciation.
Loan restructuring: not one-size-fits-all
And while helpful for borrowers with enough income to pay their mortgages, loan restructuring is not the best course of action if borrowers are simply unable to afford their homes, some said. Dominion Bond Rating Service warned last week that while modifying loan terms will have the most immediate impact on delinquency and foreclosure rates, "They are not a prudent alternative for borrowers who are fundamentally unable to afford their homes."
A Congressional hearing on the matter - and on how securitization has influenced subprime loan underwriting - is scheduled for April 16. Some lawmakers last week suggested bailout measures that would interfere with pooling and servicing agreements, such as mandatory loan restructuring. Although not ruled out, requirements to restructure loans that are currently in securitization pools would be tricky, as most pooling and servicing agreements place caps of between 5% and 10% on the portion of loans that can be modified from their existing repayment plans.
A consumer attorney recently testifying before Congress suggested lawmakers mandate "moratoriums and debt restructuring in order to avoid a national disaster, and to ensure that investors are absorbing some of the losses that otherwise will fall solely on America's homeowners."
"These loans are all made to order to Wall Street investors who purchase them almost immediately after they are created," Philadelphia attorney Irv Ackelsberg testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs on March 22.
"In the ordinary course of their business, these servicers never have to justify a quick foreclosure; they do, however, have to answer to their investors for any forbearance being offered to the borrowers."
Fed considers broadening HOEPA
Industry experts are widely expecting the introduction of legislation that would apply a federal standard to subprime lending by the end of April. Additionally, the Federal Reserve Board is currently considering whether to use its Home Ownership and Equity Protection Act authority to label a broader swath of mortgage products as "unfair and deceptive." Currently, the label covers mortgages that charge points and fees above a certain level.
Relatively strong assignee liability provisions have generally kept such loans out of securitizations, said Donald Lampe, a partner in the law firm Womble Carlyle Sandridge & Rice. Federal legislation could also increase the swath of subprime mortgage loans with assignee liability provisions in the future, a movement that would likely cause a sizable reduction in home-equity securitizations.
But, according to Lampe, states are likely to move faster toward fighting predatory lending than the federal government in the coming months. "At the end of the day, we may have more impact from the states than what is going on in Congress, effectively," Lampe said. "Keep an eye on the states always."
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