Paulson Pushes Rate Freeze Plan
The authors of a plan to streamline loan modifications and refinancings for 1.2 million subprime borrows are hoping it will be adopted as a market standard and protect servicers from being sued by disgruntled investors.
"We hope that these guidelines will be adopted as reasonable and customary standard practice across the entire servicing industry," Treasury secretary Henry Paulson said.
Treasury officials and federal banking regulators worked out the details of the loan modification plan with the American Securitization Forum and other Hope Now alliance members, which includes lenders and servicers.
ASF is recommending that servicers and trustees of mortgage-backed securities adopt the loan modification guidance framework for freezing the interest rate on certain adjustable-rate subprime mortgages for five years.
"While the focus of the ASF framework is to facilitate refinancing and loan modification, it has been designed to balance the interests of borrowers and investors and preserve the benefits of the securitization market," ASF deputy executive director Tom Deutsch said.
The ASF executive stressed, however, that servicers are not expected to take any action that is prohibited by the pooling and servicing agreements. ASF also has recommended standards for servicers to report loan modification activities to investors.
Hope Alliance members service 84% of all subprime loans and they are betting the endorsement of federal regulators, along with rulings by the Internal Revenue Service and Securities and Exchange Commission will shield them from lawsuits.
Comptroller of the Currency John Dugan said, "I strongly support this programmatic approach" to loan modifications. He noted that national banks service 20% of all subprime loans.
The support of the Treasury Department and banking regulators "buttresses" the comfort level servicers should have in adopting the streamlined procedures, ASF executive director George Miller said at press conference with Secretary Paulson. "But certainly there is no complete isolation from legal exposure," he added.
Under the plan, subprime borrowers can be quickly identified and "fast tracked" into a loan modification where the starter rate on the subprime ARM is frozen for five years.
"Those eligible for the streamlined modification will receive a five-year extension of their existing interest rate," said Michael Heid, co-president of Wells Fargo Home Mortgage.
Subprime borrowers with a credit score of less than 660 who can't afford a reset on their ARM and have less than 3% equity in their home could qualify -- including borrowers who are not more than 30 days delinquent and have missed two payments in the last 12 months.
Other subprime borrowers who are current but have higher credit scores or more equity would be refinanced into a Federal Housing Administration loan or other available products. The plan relies heavily on FHA for refinancing these borrowers. The new FHA Secure program also provides a refinancing outlet for delinquent borrowers.
Meanwhile, Treasury officials expedited the issuance of an IRS ruling so servicers don't have to worry about the tax status of the securitization trusts (REMICs) if they modify a large number of loans.
Revenue Ruling 2007-72 says the IRS will not challenge the tax status of real estate mortgage investment corporations holding loans that are "fast tracked" and modified for five years under the ASF guidance. The ASF guidance is attached to the Revenue Ruling.
The SEC is expected to issue a statement soon that says loan modifications to freeze the interest rate for five years will not threaten the trusts "qualified special purpose entity" treatment under SEC accounting rules.
"The process of obtaining clarification of the accounting treatment by the SEC has already commenced," Mr. Heid said.
The Wells Fargo executive said servicers should be able to start processing subprime borrowers under the new streamlined procedures in a matter of weeks, not months.
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