Bush Urges Help on Resets
With rising delinquencies and defaults, mortgage servicers are coming under increasing pressure to help troubled borrowers restructure their loans, particularly adjustable-rate subprime loans that are due to reset.
President George Bush has instructed the Treasury Department and Department of Housing and Urban Development to work with lenders, servicers and nonprofit housing groups to identify and help struggling homeowners through counseling and loan modifications.
"I strongly urge lenders to work with homeowners to adjust their mortgages. I believe lenders have a responsibility to help these good people to renegotiate so they can stay in their homes," President Bush said.
To facilitate writedowns, the president pledged to work with Congress to temporarily amend the tax code so homeowners are not hit with a large tax bill when a lender forgives $20,000 of the principal amount of the mortgage. Congress has to pass legislation to make this change.
"When your home is losing value and your family is under stress, the last thing you need is to be hit with higher taxes," the president said in outlining his administration's efforts to help troubled subprime borrowers.
To increase refinancing options, the Bush administration has relaxed Federal Housing Administration underwriting criteria so FHA lenders can refinance delinquent ARM borrowers.
Treasury undersecretary Robert Steel told a House panel last week that he is working with the government-sponsored enterprises - Fannie Mae and Freddie Mac - to develop loan products to help refinance subprime borrowers.
He noted studies show a large number of borrowers ended up in subprime loans, when they could have originally qualified for a prime mortgage. "In those cases, the GSEs could help," he told the House Financial Services Committee.
Federal Deposit Insurance Corp. chairman Sheila Bair told the committee members that $353 billion in subprime mortgage are due to reset before the end of 2008. And most servicers have the flexibility to assist homeowners who are facing a jump in their monthly payments and can't afford it.
"Most securitization documents allow servicers to proactively contact borrowers at risk of default, assess whether default is reasonably foreseeable and, if so, apply loss mitigation strategies designed to achieve sustainable mortgage obligations that keep borrowers in their homes," Ms. Bair testified.
Federal and state banking regulators issued a joint "Statement of Loss Mitigation Strategies for Servicers" last week that encourages servicers to be proactive in restructuring and modifying loans.
The FDIC chairman stressed that servicers should avoid temporary measures that do not address the borrower's ongoing difficulties with unaffordable payments. "Clearly, fixed-rate obligations provide the best opportunity to long-term stability," she said. And she warned that debt-to-income ratios above 50% will likely lead to future payment problems.
However, it appears that some servicers are extending the teaser rate on ARMs for three to five years to keep the borrowers in their homes.
Senate Banking Committee chairman Chris Dodd, D-Conn., said the regulators' guidance on restructuring is "late in coming" and does not ensure servicers will modify loans for long term-affordability.
"We cannot tolerate short-term modifications that put off the day of reckoning," Sen. Dodd said. "The administration and regulators must now lend more than their voice to this effort. They must bring the full powers of their agencies to bear to make sure subprime servicers are doing modifications to save American homeowners from foreclosure."
The American Securitization Forum said the regulators' statement on loss mitigation strategies will supplement the ASF's industry-developed guidance on loan modifications.
"We believe that loan modifications are an important loss mitigation tool, and that servicers should be permitted and encouraged to consider modifications for subprime loans that are in or likely to experience default," ASF executive director George Miller said. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com/