With the slew of Federal initiatives aimed at restoring stability in the capital markets, attention has finally been paid to the struggling mortgage industry - which might now be gaining some traction in the loan modification space, market participants said.
HOPE NOW, an alliance of mortgage servicers, counselors, and investors, announced that the mortgage industry prevented 225,000 foreclosures in October 2008, 13,000 more than the record set the previous month.
Approximately 1.7 million foreclosures have been prevented by the mortgage lending industry in the first 10 months of 2008, more than the approximately 1.5 million prevented in all of 2007. If this pace continues, in 2008 the mortgage lending industry will prevent more than 2.2 million foreclosures, 45 percent more than in 2007, HOPE NOW said.
One mortgage servicer, Ocwen, has modified a total of 47,723 loans this year, representing close to 14% of their 350,000-loan servicing portfolio, according to a recent report on loan modifications from Merrill Lynch.
And just last month, the Federal Housing Finance Agency (FHFA) announced a streamlined modification program for loans owned and guaranteed by Fannie Mae and Freddie Mac, and the Federal Deposit Insurance Corp. (FDIC) proposed a loss-sharing program to jumpstart modifications in the private sector.
But while the market has seen an increased number of loan modification initiatives rise out of some of the biggest U.S. lenders, especially in the last month, it appears that the most successful programs are where the lender still owns the loan being modified.
"For a lender that owns a loan and knows that it was originated properly, a modification can happen very fast," said Terry Wakefield, chief executive officer of The Wakefield Co., a mortgage consulting firm. These types of modifications are occurring at an impressive rate, Wakefield said, because lenders realize it is in their economic interest to keep the borrower in their home. From a legal standpoint, they are clear to proceed because they own the loan, he said.
Last month, Citigroup announced a Homeowner Assistance program targeted at a select group of 500,000 homeowners whose mortgages Citi holds and though not yet delinquent, are at risk of becoming delinquent on their mortgage payments. The bank said it will reach out to borrowers through phone calls, written correspondence, email, toll-free assistance lines, online social networks, and external counselors.
Loan modification strategies will mimic the streamlined loan modification techniques seen in the model used by the FDIC when it took over IndyMac Bank, and will include interest rate reductions, extension of term, or forgiveness of principal.
Citi expects the plan to result in the workout of approximately $20 billion in underlying mortgage balances.
Despite the success of lender/owner modified loans, the majority of mortgage loans are held in securitizations, which restrict a servicer from unilaterally modifying the terms of the instrument to the loss of the investor. This has been a widely disputed factor challenging the growth of loan modifications in the U.S.
Last week, Greenwich Financial Services filed a lawsuit in New York State Supreme Court against Countrywide Financial, now owned by Bank of America, alleging that the proposed modification of 400,000 home loans originally underwritten by Countrywide is illegal because they are owned by trusts that were sold through securitization, according to published reports. The reduction in borrower mortgage payments would cause a loss of $8.4 billion, reports said.
Another challenge to modifying loans that has not been discussed, Wakefield said, relates to the tax consequences of a reduction in the principal balance. The amount of the principal balance reduction becomes taxable income to the already cash-strapped borrower. "When you forgive a debt, the IRS considers that a taxable event. Is the IRS going to issue a ruling that makes all modifications that reduce the outstanding principal balance non-taxable events? I doubt it," he said.
According to Bennet Koren, head of the consumer financial services practice at McGlinchey Stafford, the real issue is not the implementation of the loan modification; it is the sale. "If you are a homeowner, are you sitting and waiting thinking, should I take the modification that is out there now or is there something better to come?"
But despite these unresolved complications, loan modification initiatives continue to stream into the market, which makes implementing these modifications an arduous task. This is why simplification initiatives are a welcome hand.
Last week, law firm McGlinchey Stafford introduced what it calls a Turn-Key Mortgage Modification Solution, an electronic platform that provides streamlined loan modification processing, at a "low, per-unit fixed cost." The program uses forms that fit almost all possible combinations of modification terms and can be completely outsourced to the law firm or accessed via the internet directly by a lender's employees. For instance, if a client sends the firm the terms of a modification, McGlinchey will create a document to reflect those terms and send it back to the client for execution. Clients primarily include servicers doing modifications on behalf of the owners of these loans, lenders that own the loans they are modifying, or, in some situations, brokers who arrange for a loan modification.
Part of the allure of a modification platform like this one is the versatility of the loan modification documentation. "All fifty states have their own mortgage laws, and you have to have language in the document itself that is flexible enough to work with most terms, or at least that is easily modifiable to do that," Koren said.
Furthermore, depending on the type of modification, one of the things that also has to be addressed is whether or not the modification agreement should be recorded in the mortgage records, Koren said. "If you do record it, you have to meet the form requirements for a document that can be recorded under state law. Some states will have certain page or margin requirements for documents, and this is an effort to create a document set that will work for lenders in most situations."
Data analysis companies are also aiming to streamline the loan modification process. Response Analytics, a software and services provider has a suite of products geared at potential whole loan buyers, sellers and servicers, according to Chief Executive Officer Brent Lippman. These products help customers assess the hold-to-maturity values of their portfolios, while also calculating which loans could be best helped with a loan modification and what form of modification would be most beneficial, Lippman said.
Yet despite the strides made in preventing foreclosures, many borrowers are still likely to redefault and modifications are just prolonging the inevitable, market participants said. This situation also needs to be identified in the analytics process.
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