Hope Now Servicing Picks Up

Hope Now servicers picked up the pace in the second quarter and completed 220,100 loan modifications, up 30% from the first quarter.

Loan modifications for subprime loans jumped from 122,100 in the first quarter to 164,200 in the second quarter, while modifications involving prime mortgages rose from 48,100 to 55,100 over the same period.

But the servicers could show better results and prevent more foreclosures if they could get the second-lien holders to cooperate when the first lien is modified or refinanced.

To encourage that cooperation, the Hope Now servicers have agreed to re-subordinate the second lien and not put it in a worse position when the first lien is modified or refinanced.

"That is a big commitment because sometimes all the parties have not been communicating well and working together to make that happen," said Hope Now executive director Faith Schwartz.

In distressed markets like California and Florida where house prices have declined by 25% to 40%, the equity in the property no longer supports a second lien.

Nevertheless, second-lien holders can block a loan modification, refinancing or short sale if they are not appeased. A re-subordination is one way to appease them. A cash payment is another.

Congress recently passed a housing bill that creates a Federal Housing Administration foreclosure prevention program to refinance struggling homeowners with underwater mortgages. In that program, second-lien holders may be given a share in future appreciation in the value of the property.

"There are no easy solutions," said Michael Stevens, senior vice president of the Conference of State Bank Supervisors.

CSBS and state attorneys generals have been monitoring servicers and their workout efforts since last summer. Now they are working with servicers in developing best practices.

"Re-subordination is a method to get the loan refinanced or modified," he said. "The problem is that the modifications need to be long-term sustainable solutions."

If the investor is willing to hold the second lien and wait to collect when the property is sold, "that is not a bad solution," Mr. Stevens said. "If the borrower is expected to perform on that loan, then you have to question the sustainability of that modification."

Hope Now servicers completed nearly 522,000 loan workouts in the second quarter, up 8% from the first quarter and 301,900 troubled borrowers ended up in repayment plans.

The Hope Now data also show sales of foreclosed properties totaled 245,700 in the second quarter - up 34% since the fourth quarter.

Sales of foreclosed properties resulting from subprime defaults totaled 138,000 in the second quarter and sales of foreclosed properties resulting from prime loan defaults totaled 107,700.

At the height of the housing boom in 2005 and 2006, Federal Reserve Board researchers found that lenders made 2.8 million junior liens for the purpose of purchasing a home.

These were known as piggybacks where a first mortgage and a second lien are originated simultaneously. Based on Home Mortgage Disclosure Act data, Fed researchers estimate piggybacks were used in 22% of home purchase transactions and about half of those transactions involved subprime loans.

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