AGs Still Playing a Huge Role in Servicing

If you think Hope Now is the driving force behind the effort to promote streamlined loan modifications, think again. These days, the FDIC and state attorneys general are the top cops in town when it comes to overseeing the industry's efforts to keep more homeowners in their homes.

And in the good cop, bad cop tradition, the AGs and banking regulators want the industry to know that they could take more aggressive enforcement action if they think lenders are not doing enough to mitigate the foreclosure crisis.

In early October, Bank of America agreed to provide loan modifications on up to 397,000 Countrywide loans under a settlement with the attorneys general of Iowa and other states. A few weeks later, JPMorgan Chase announced a similar, systemic effort to reach out to troubled borrowers and prevent foreclosures. Both programs seem modeled closely after the FDIC's plan to provide assistance to IndyMac borrowers, especially those facing unaffordable payment resets on payment-option ARMs. The FDIC has promoted efforts to streamline loan modifications that reduce the borrowers interest rate by refinancing them into a fixed-rate loan, even if the rate or other terms need to be altered so that borrowers pay no more than 38% of their gross income toward their monthly housing costs. Some banks are reducing the payment to principal, interest, taxes and insurance even lower - to 31% in some cases - in order to avert foreclosing on the loans in a difficult housing environment where loss ratios are rising on foreclosures. Iowa attorney general Tom Miller explained in an interview that he believes a systemic approach is necessary to aid homeowners. He said most of the industry's biggest mortgage servicers are setting up meetings or discussions with a state foreclosure prevention working group, of which he is one of the leaders. While most are considering a systemic approach, he said there are some holdouts that remain focused on taking a case-by-case approach to loan workouts and are reluctant to embrace a streamlined modification program.

"That's not acceptable. That's not going to work as an answer or a policy," Mr. Miller said.

He said the AGs and banking regulators involved in the foreclosure prevention working group are supportive of the Bank of America concept and wrote to other servicers, including Chase, asking them to do at least as much for their borrowers.

And some servicers are going beyond modifying the rate and terms of the loan, he said. One of the servicers in discussions with the AGs and regulators has been reducing the principal amount of the home loan to make the payments affordable.

"There is a sense that they are going to get the lowest default rate if they are reducing the principal as opposed to lowering the interest rate," Mr. Miller said.

The goal of the working group is to find out what is going on in the marketplace and to help lenders get to a point where modifications are made more quickly and the quality of the modified loans is better so that housing markets can stabilize, homeowners can stay in their homes and investors can see lower foreclosure-related losses, he said.