Wall Street, Servicers Search for Ways to Aid Borrowers
Wall Street investment bankers, lenders and servicers are exploring ways to help distressed borrowers whose loans are in subprime securitizations and are trying to convince Congress that they can get the job done and prevent massive foreclosures.
It is generally acknowledged that restrictions in subprime mortgage-backed securities contracts make loan workouts and restructurings difficult.
However, executives from Lehman Brothers and Bear Stearns & Co. have assured Congress that servicers are modifying loans and taking other loss mitigation steps under existing securitization contracts.
"There are restrictions but I don't think they are insurmountable," Bear Stearns senior managing director Gyan Sinha told a Senate housing subcommittee.
With housing prices "sagging" and defaults and foreclosures rising, he said the MBS investors and trustees would be "shooting themselves in the foot" if they don't respond by restructuring the loans.
Lehman Brothers managing director David Sherr testified that in this environment the interests of the borrower and the investor are very much aligned.
"At the end of the day, the servicer has a tremendous amount of flexibility to do what is in the best interest of that securitization," Mr. Sherr testified.
At a summit last week, the Federal Deposit Insurance Corp. solicited expert advice on ways to restructure adjustable-rate 2/28s mortgages in subprime securitizations.
The discussion produced one promising loan modification concept, FDIC chairman Sheila Bair said, and the industry participants agreed to work together to provide servicers flexibility to modify and restructure troubled loans in subprime MBS.
The lenders, securitizers and servicers also agreed to return to the next meeting with a "battle plan," she told the House Financial Services Committee.
The loan modification discussed would help borrowers with 2/28s that are current on their monthly payments, but are likely to fall behind when the loan resets at the fully indexed rate.
The proposal would keep the interest rate at the starter rate so the ARM does not reset and push the monthly payments higher.
It was learned at the April 16 FDIC summit that subprime MBS investors really don't have a realistic expectation of getting the higher reset rate, due to high prepayment and refinancing rates.
Even though investors would incur a loss with the modification, "I think they are willing to do that," Ms. Bair told reporters. She pointed out that the alternative, which is foreclosure, would cause bigger losses.
One huddle is an accounting interpretation that requires securitized mortgages to be delinquent 30 days before it can be restructured. The FDIC chairman said that is a "problem" and she plans to discuss it with the Financial Accounting Standards Board.
Despite some promising discussions, Chairman Bair warned Congress last week the restructuring process is not going to be easy. "Servicers are going to have to work with borrowers on a case-by-case basis. It is going to have to be a market driven situation," she said.
So far, it appears that Congress prefers that the private sector take the lead in the restructuring effort and there is no rush to legislate.
Sen. Jack Reed, D-R.I., told reporters every part of the industry has an incentive to avoid foreclosure.
"The question is organizationally how do align those incentives so it is done without public involvement." (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com