Are Trial Modifications Just Another Moratorium?
The mortgage marketplace, especially servicers, are continually engaged in loss mitigation processes that entail new legislation, counseling, data analytics systems, technology, and other tools designed to ease the crisis. Related issues within the mortgage servicing space are subject to debate and grounds for differing opinions. Insidersí pros and cons to current market changes reflect how experts see the future of their industry, how soon they expect to see the light at the end of the tunnel ó and whether they are more optimistic about the present. Moratoriums already have received negative press. Many disagreed with the idea calling it a political measure disconnected with market reality that simply postpones the inevitable. The inevitable being: a borrowers inability to pay the mortgage either willingly or unwillingly. That discourse has died down. New market developments, including the Home Affordable Modification Program and its trial modification requirement are now at the forefront. And the 90-day trial period before a loan modification is officially recorded on the books as successful, besides complicating data reporting and overall delinquency statistics, reminds one of a moratorium. If unpredictable factors such as job loss, health issues and natural disasters are taken out of the equation, there is little borrower information, if anything left to add to justify the prolonged suspense. Is the trial-modification period worth it, or is it just another moratorium that postpones the inevitable?Marc Helm, Chief operating officer of Reverse MortgageSolutions, Spring, TXPro-Con: I donít buy into it. The program pays incentives to the lenders who do loan modifications, which is based on the fact that those loans stay current for a certain amount of time. Judging from the numbers Iím hearing from my industry counterparts, there is significant fallout from these modifications. Hereís the issue with the modifications, in my opinion. Mind you at one time about five years ago I managed all of default at Washington Mutual, so I have experience in loss mitigation. I donít think a modification should be done for the sake of doing a modification and for the sake of driving a fee off; Or just for the sake of the investor saying: I paid the fee, we did everything we could; And the servicer saying: I did the modification, and whether Iím getting a fee or not, Iíve done everything I could. Good common sense practices dictate that modifications should be done only if they have a chance at working. I do believe that you need to go out and solicit everybody that you think that qualifies, because you really can never know if a modification works until you talk to them, get their financials updated and so on, to be able to determine if a borrower can really pay on a loan to bring it current. It is all about getting the right focus, focusing the right way. If a modification works, do it.What I think of a loan modification trial period? I might be against conventional wisdom, but I donít buy into it, and hereís why. If youíre an investor or servicer, or youíre a fiduciary for this investor or the investor invested in that loan, whether itís Fannie Mae owning that stock, whether youíre a Wall Street investors, private investor or hedge fund, and youíre sitting there and your task because of government regulations for modifying a loan, there are certain parameters. And yes, it says you can do it, but unless that investor really does it, what youíve done is buy that borrower another window where that person could potentially default on that the first month, then start the foreclosure process all over again to your office. So you could be in this foreclosure process a couple months from the initial start. You got to start all over again. And you got to worry: whatís happening to that asset there belonging to the investor during this period of time? They sign up those papers and say theyíll send you payments of $800 a month. The first payment usually is a quick send, but then you may see no payments at all after the borrower signs it. Now basically, that person has bought time, whatever the recycling in the foreclosure period lasts. It is more time in the property when he does not have to do anything when not making a payment. This way the loss is higher for the investor, because youíre dragging that asset before it can be liquidated, and you got to worry what is happening to that asset during that period of time. My experience has been one where people who donít make payments typically donít keep a property maintained. And Iím concerned about that. Trial period sounds great, but let me give you one of my political issues here. It goes back to kind of liberal-conservative approach. What is the main reason why we got problems today? Itís because administrations in the past pushed us in the mortgage industry to make loans we never should have made. The rush to get people in on teaser rates, get people qualified for loans because everybody needs to have a house, but not everybody can be a homeowner.So if you look at what our losses were because in the past we said: Everybody should be a homeowner, and look where we are today. Now, we cannot turn around and say: Everybody should have a modification and save that home, when we know a big percentage of those are not going to work just like a big percentage of those mortgage loans of the past did not work. We got to be very analytical in our work and make sure that we just donít prolong the time. Modifications have to be done within reason, for the investor and everybody concerned, and letís not do something we know the borrower cannot handle. Jon Daurio, chairman, Kondaur Capital Corp., Orange, Calif.