A new modification bill (Preserving Homes and Communities Act of 2009) was introduced in the U.S. Senate to expand loan-modification programs and place new restrictions on lenders before they can initiate foreclosure proceedings.
The bill would require all lenders and servicers to evaluate homeowners for affordable modifications before starting foreclosure. It also requires that servicers and lenders offer the mod to the borrower, as long as the NPV of the mod is higher than a foreclosure.
Further, it expands the qualification criteria to include more home owners and stops all foreclosure proceedings while the servicer determines whether a loan is eligible. Finally, it gives the borrower some legal tools and imposes penalties on servicers and lenders who fail to follow the program’s rules.
Analysts at Barclays said that targeted modifications are likely to reduce overall losses to the trust and potentially improve bond valuations, but the bill could end up further delaying the foreclosure and REO process.
“The eventual recovery for the loans could be even more back-ended than is currently believed,” explained Barclay’s analysts. “This might lead to lower valuations at current yields. In addition, the assumptions used for the NPV calculation are likely to be more benign than the markets projections. This should mean that investors demand a higher yield to be compensated for what would be viewed as uneconomic decisions (in terms of which borrowers are modified) at the markets base case assumptions.”