Are Servicers Ready to Embrace HAM Incentives?

While the federal government continues to dish out loan modification incentives, small- to medium-size servicers are measuring potential losses before they take the bite.

Recent amendments to the Home Affordable Modification program by the Department of Treasury offer special incentives for second-mortgage-lien holders.

Michael Brauneis, director of regulatory risk consulting at Protiviti, Menlo Park, CA, says these added benefits are not strong enough to compensate for related losses. Historically the first mortgage lender has had a bigger incentive to modify the first-lien than the second-lien holder, which obviously has some impact on the aggregate affordability of the home, he explained. The new Treasury incentives aim to encourage the second-lien holder to reduce the interest rate, or to forgive the lien altogether. Plus for borrowers who qualify for HAM and enter the trial period, lenders are also required to evaluate whether they qualify for the Hope for Homeowners program or refinancing - instead of a modification. "So far the performance of the Hope program has been drastically short of expectations," he said. "This is an attempt to at least save some face for the program, but what we really need to see is a revision of the program guidelines" before it can have any real impact.

Since the value of the incentives offered to second-lien holders is relatively limited, he does not expect it "to make a big difference." Seconds are so far under water anyway that it is not in the interest of their holders to foreclose. If the value of the first mortgage is at 100%, then all the second mortgage foreclosure proceeds from the sale are going to be taken by the first-mortgage holder. "There's no reason for the second-mortgage holder to speed up foreclosure, but rather wait and see whether the loan modification works out." Servicers' focus is on how to minimize loss. According to Mr. Brauneis the impact of the second-mortgage market has been blown out of proportion.

"For most loan holders and mortgage servicing executives, the question of whether the program will work from a macroeconomic perspective is likely less important than the immediate question of what impact the program will have on their organizations, and what steps they should be taking to prepare," said Carol Beaumier, a Protiviti executive vice president and leader of the firm's global financial crisis team, in a company release. Factors servicers may have to consider include determining whether their existing programs are compatible with the new national program "and, for those organizations with no existing plan, whether they want to participate at all."

Talking about how to use federal incentives to turn modifications into profits, Terry Couto, partner, Newbold Advisors, Bethesda, Md., noted, "A 25 basis point servicing fee is not enough for a servicer to be profitable in a high delinquency environment."

One reason being that most loans are serviced by companies that do not hold credit risk. "Investors and guarantors want servicers to do more 'high touch' loss mitigation" yet meet their contractual responsibilities at the lowest cost possible.

Servicer incentives under HAM include a $4,000 loan mod incentive, and $1,000 to $2,000 incentives for GSE short sales, he said, but Treasury has not developed any short sale or other workout incentives.

HAM is a servicer's opportunity to transform loan mod units from cost centers to profit centers - if nothing goes wrong, such as paying back incentive payments and up to $11,000 per loan in management penalties on noncompliant loans.

Before jumping in, he says, servicers need to standardize processes, embed fraud protection tools, maintain contemporaneous documentation for each loan, ensure they are compliant and hire an independent reviewer.