Pushing for Incentives, Disincentives That Help
Incentives imbedded in the Home Affordable Modification Program that attempt to address debt forgiveness and second-lien concessions may be a good start into the right path, but are they enough?
People would find a way to continue to make their mortgage payment, says Richard Powers, SVP of real estate services at Altisource Portfolio Solutions. "If there's a strong economic incentive to do so," despite of whether they have equity in their home or are "underwater" by and large, people would continue to make that payment unless they are unable to because of job loss or a family problem. "The dynamic of change" in today's market is that the number of borrowers who are behind or upside down on the equity curve because they put themselves in that spot, or did not realize that real estate values can also go down, he says, is high. The situation is very different from regional foreclosure spikes because of job losses and involves a different solution.
Recent HAMP changes that consider debt forgiveness on first and possibly second liens as a way to encourage underwater borrowers to continue paying, or second-lien concessions that would result in better back-end debt-to-income ratios, are examples of high potential tools once Treasury fine-tunes processing details. The program places earned debt forgiveness, with debt forbearance at the top of the waterfall and includes the insertion of an alternate net-present-value path servicers can consider when offering a modification. It adds to the standard path of rate reduction, followed by term extensions and forbearance. The goal is to get to 115 CLTV with balance forbearance while the borrower's payment remains at above a 31% debt-to-income ratio. Plus, as the borrower remains current on the modified loan the forborne debt can be forgiven in equal parts over a three-year period. If the loan has a second lien behind it, the program might require some extinguishment from the second lien holder as well.
However, in each case and before making a final determination the servicer can consider the incentive payments to the mortgage trust, mortgage insurance claims and partial payments and second-lien compensation payments.
There also are incentives for writedowns on both the first- and second-lien investors that receive some compensation for every dollar that they decide to forgive. For example, second-lien loans more than six months delinquent get six cents to a dollar forgiven.
In situations where there is no contract obligation to hold all parties to the mortgage transaction accountable, incentives, even certain disincentives, could help avoid foreclosures, even so-called strategic defaults.
"There are two basic groups of people who need help: the strategic defaulters, who are extremely upside down, and those who just have financial difficulties that put them into a situation where they cannot pay their bills," says Wade Comeaux, president of Chicago-based specialty subservicer Fay Financial.
Comeaux is concerned that while the above are two entirely different situations that require entirely different solutions, "at every turn" servicers are forced to use HAMP.
"If you're way upside down on your home, a HAMP modification may not be that great of an incentive because you're really not getting a principle reduction. And whenever you're upside down on your mortgage, you just want the payment to be lower. And in many instances, because we're only looking at the mortgage, and not looking at the entire situation, it may not resolve the situation, and that leads to high recidivisms."
Currently most of the options available to borrowers in distress are based on a national response to regional problems challenging servicers to better combine government and private solutions.
Jim Satterwhite, EVP with Infusion Technologies, finds such incentives, or disincentives, can be secured by "more nuanced solutions" that can overcome issues created by national policy solutions that inherently do not address regional problems. For example, he said, in California the biggest issue was with subprime loans, in Florida there were a lot of speculators and in Michigan unemployment. "One size does not fit all that well." Hence, factors like unemployment and loan-to-values have different impacts on different markets.
Similarly, borrowers are affected by different circumstances.
What has changed, says Cary Sternberg, president of Excellon REO, a division of Titanium Holdings, is that in the past borrowers were able to go into a bank to meet a banker who knew who they were and they could trust would make a decision based on their specific circumstances, financial history and credit quality.
"Now, bankers ask what's the score and that determines whether you get the loan. We need to insist that we examine every person's case or circumstance and see if we can find something that will fit their needs-instead of just trying to come up with a blanket policy that's trying to fit everybody. It just won't work."
Presently the market is at a point where the GSEs are making up to 90% of all mortgages completed "and I don't see a massive change in that coming in the near future," said Satterwhite. Consequently, besides managing defaults and foreclosures the challenge is to provide well-designed products and interest rates that are low enough they can stimulate demand for the homes that are going to come out of the shadow inventory. "I wonder how that is going to be funded because FHA is tightening, the other agencies are tightening and policymakers will have to decide how much is funded by the government."