LETTER TO THE EDITOR
We are far along in discussions with a state regarding implementation of an online mortgage modification program that I developed along with others, which we call the "Mortgage Crisis Solution Program." The program facilitates efficient mass mortgage modification and stabilization of the housing market. Program materials are available at www.internetlawny.com under the "Home Mortgage" button on the top right of the homepage. We have been asked by the state's director of housing to obtain servicer comments to the program prior to finalizing our implementation proposal.
Program basics: Homeowners bid an affordable monthly payment amount and investors bid a minimally acceptable interest rate. These bids could take place separately or simultaneously. The program matches homeowners and investors to maximize results. We add a monthly insurance premium and fees percentage to the interest rate to build an effective total "interest rate" and use that to compute a principal amount. The servicer can accept or reject the new principal amount. If subordinate a mortgage exists, after acceptance by the primary servicer, control is then passed to the subordinate servicer. Once the servicer accepts, the documents are generated, the modification is complete, and the new terms will apply to the Time-Out Mortgage (what we call the modified interest-only loan created through the program). The program permits not-for-profit housing counselors to be the homeowner's entry point into the program thereby confirming the affordability of the monthly payment bid. Although the program seems relatively simple, it has complex economic incentives built into the program.
In many, if not most cases, we expect the program-developed principal amount to be equal to the amount owed under the existing mortgage. However, in the event a servicer accepts a lower principal amount, this creates an amount, which we call "Deferred Recapture Amount," which is divided among the homeowner, investor and mortgage holder. The program includes a zero-subsidy insurance fund that will work like the zero-subsidy U.S. Small Business Administration Guaranty Program. The program, as developed, includes an initial insurance premium, which is paid from the new cash principal amount received from the Investor. Each homeowner monthly payment includes a monthly insurance premium amount as well as amounts for program fees and servicer fees. To the extent a mortgage that is already insured (i.e., FHA, etc.) enters the program and is modified, that insurance will continue in effect, and, with state implementation, will be layered primary above the program-developed insurance fund.
The servicer's role in the program is as follows: * Provide digital copy of mortgage data in standardized format for serviced mortgages to be entered into program administrator's online database. * Accept or reject a principal amount to "modify" the existing mortgage via program software. * Communicate with program participant homeowners through the program software. * Continue servicing the modified mortgage at the same servicing fee. The positive attributes of the program from the servicer's viewpoint that we have identified include: * Efficiently maximize servicing fees (interest-only and more performing loans). * Efficiently maximize return on distressed mortgages while minimizing costs. * Minimize servicer time and cost involving defaults. * Fast efficient resolution of mortgage defaults, many without hands-on involvement. * Significantly reduce servicer staffing requirements. We specifically request comments on the following items: payment of the initial insurance premium out of the new principal amount, especially for nondefaulting homeowners. Whether to set a servicer default premium "discount rate" which will be accepted in modifying defaulted mortgages or accept discounted modification on a case-by-case basis. Continuing the current servicing arrangements.
Although the specific arrangements would be subject to implementing legislation and regulation, we contemplate that existing servicing agreements including existing fee arrangements would be utilized by a servicer to continue servicing the program-modified Time-Out Mortgage.
We would greatly appreciate any feedback that would facilitate program implementation and servicer participation.
Ira R. Hecht, Esq.