Want to Help a Late Borrower? Give Him a Job
Plenty of ink has been spilled in the trade press about loan modifications. And plenty more will be spilled throughout 2009 and then some. Do loan mods work? Should the government spend taxpayer money to restructure thousands, if not hundreds of thousands of delinquent mortgages? Good questions one and all.
The devil, as always, is in the details. Loan mods can be tricky and complicated because of the legal ramifications. First off, what type of loan-mod plan are we talking about? If a lender/servicer holds a troubled mortgage in portfolio and the note has not been securitized it's then up to that lender/servicer to make a decision on a loan mod. But if a mortgage has been securitized and resides in a legal "trust" that's where matters get complicated.
Some investors (fearing lost income) will not grant permission to modify a note. They fear that they will lose money on not only delinquent loans but that it sets a precedent. They worry that if they grant permission on nonperforming loans what's next: subperforming and current mortgages that could go delinquent?
There's an easy solution to getting around investor concerns. The Treasury Department can use some of the $700 billion of TARP money to purchase MBS backed by delinquent subprime loans. Once these securities and trusts are in the hands of Uncle Sam they can break apart the ABS/MBS into whole loans and do what they like with them. (That's how one mortgage bottom fisher explained it to me.)
The "buy 'em and break 'em" concept sounds promising but then again, Treasury has nixed the idea of purchasing MBS and ABS as part of the $700 billion bailout. Of course, that was the Bush Treasury Department. By the time you read this the Obama team will be just about in place and they can do what they want with the remaining $350 billion, that is, if Henry Paulson doesn't spend it all before Jan. 20.
It's sort of funny. What started out as a mortgage crisis has now grown into a pan-business crisis affecting homebuilding, insurance, automobile companies and the list goes on and on. And it all started with the little old 30-year mortgage, the "subprime" of the species. The "virus" has infected the entire mortgage body and then some.
But getting back to loan modifications. I remember interviewing Faith Schwartz of the Hope Now alliance back in the summer. The alliance was marveling at what a wonderful job its members (lenders and servicers mostly) had been doing on helping hundreds of thousands avoid foreclosure. It all sounded wonderful but then I asked her if Hope Now knew how many of its two million in modified loans had gone south again? Her reply: we don't know.
At press time, the Office of the Comptroller of the Currency had just released a study showing that modified loans restructured in 1Q 2008 had a 36% delinquency rate in the 30-plus-day category and 53% in the 60-plus-day category. The 2Q loan mod numbers were about the same: not good. These figures do not take into account the much-ballyhooed IndyMac loan-mod program, which became operative late this summer when the FDIC took control of that once-high-flying alt-A lender. Who knows, maybe the IndyMac rewrites will be better. (Agency chief Sheila Bair is counting on it.)
For the mortgage industry and government, loan modifications boil down to this: Does it make financial sense to rewrite thousands upon thousands of loans if they wind up going bad eventually? It's a fair question. Consumers do not go belly-up just because their house becomes "under water." The payments stop when they lose their jobs. One solution might be to get more Americans back to work, which is a tall task given that the unemployment rate is just shy of 7%.