The Implementation Challenge
At least one industry veteran sees the Obama Housing plan as an opportunity that is basically giving every defaulted loan a second chance. It will work only if the right future performance filters are applied before these toxic assets are flushed out of a bank's balance sheet.
The Obama plan is a good program with a challenge: Implementation! President and CEO of DepotPoint, Inc., Bellevue, Wash., Prakash Kondepudi says.
He believes servicers are aware of the need to gain some flexibility in their loan evaluation and create models that allow them to ensure a consistent analysis that fits investor requirements and help reestablish investors' trust. The challenge with loan modifications is that nobody can do anything until the servicer gets some flexibility from their investor. Apparently, a need for risk reduction and investment flexibility faced by servicers and investors, makes it difficult to agree on who should take action first. It reminds one of the ancient dilemma: what comes first, the chicken or the egg?
Asked whether he sees that parallel there, he responded "That's why I support the Obama Housing Plan."
"We have been living with uncertainty ...now the plan provides guidelines, so it's not a guessing game, so now investors should come to their senses and say: This is the reality. These loans we have a chance, these other loans we do not have a chance. Let's allow some flexibility to these homeowners so they have a chance."
Granted details on the Obama Plan still are in the process of getting settled, specific guidelines are becoming available.
"In understanding the plan, the challenge of course is: How aggressively are servicers moving on and are they staffed up to handle the scale? Do they have processes and technology in place? Are there enough knowledgeable people for the job? "
In his view the latter has turned into a classic issue because there is a huge shortage in the servicing side when it comes to the default area and loss mitigation expertise.
There is no tradition there among servicers he argued, because in the past they were mostly catering to performing loans that secured a consistent revenue stream. The biggest stumbling bloc in achieving modification standards is that related agreements need to be more enhanced so servicers have the framework within which to operate.
Currently investors who bought mortgage backed security assets that are not performing as expected so they are interested in cutting their losses. So "with respect to the trenches or pools that they participated in they [servicers] now need to be able to say: If the loan modification is done, here is how it is going to give you recovery." There are lots of complications associated with the process, he agrees, but, again, "servicer by servicer, it's not impossible, the technology is there, the tools are there. They just need to build that and than get engaged and get the servicers to participate."
However, it is common knowledge that investors are not engaged yet. Many investors agree the Obama Housing Plan is a good plan, however, they are not ready to take action unless the government starts purchasing non-performing assets, which it seems, will take off soon.
"Investors got burned, so they're extremely cautious." He believes investor apathy will change.
The initial step is what has already started to happen, he said. The first bulk of modified loans will come from government owned and insured loans such as Fannie Mae, Freddie Mac and FHA loans.
"If you look at the wider framework of loans, these are the loans that have a chance to pass through eligibility. Jumbo loans, or other non-government loans won't even qualify here. So basically we do have a criteria rather than dealing with everything as one pool. Last year when looking at all these different types of loans the big question was: Which loans are good for modification? Now at least it is clear what kinds of loans have a chance for modifications and which ones do not qualify."