Obama Will Push Mods

The writing is on the wall and the mortgage industry knows the new administration of President Barack Obama is going to push for an aggressive loan modification effort to prevent foreclosures.

“We are working very hard to develop a set of solutions that will not only help stabilize the housing market but also help keep hard-working families in their homes,” Obama economic team member Brian Deese said during a recent webcast chat.

Financial services groups are wary of the new administration because of Mr. Obama’s support for empowering bankruptcy judges to modify mortgages. They know changes to the bankruptcy code could be inserted in the president’s economic stimulus package that will be very difficult to stop. So they are working to show the transition team that using the bankruptcy courts may not be necessary. The Hope Now servicers said they will step up their loss mitigation efforts in 2009 and modify two million loans — double the number of modifications in 2008. The private sector alliance that Treasury secretary Henry Paulson helped to create also expects to double the number of troubled homeowners it helps through prepayment plans and other workout techniques.

“As the economy deteriorates, we expect to step up our efforts to meet the challenge,” said Steve Bartlett, president and chief executive of the Financial Services Roundtable.

Mortgage Bankers Association chief operating officer John Courson stressed that Hope Now will be “more aggressive” and employ “new strategies” to help homeowners. The MBA, the roundtable and the American Bankers Association also are openly supporting a Federal Deposit Insurance Corp. loan modification plan that Secretary Paulson quashed.

The FDIC plan combines streamlined modifications with loan guarantees that cover up to 50% of the loss on the default of a modified loan. The Obama team has endorsed the FDIC approach and they are expected to provide funding for the loan guarantees.

When asked about bankruptcy, the trade executives warned that allowing bankruptcy judges to reduce or “cram down” the principal amount of a mortgage would increase the cost of mortgage credit permanently and cause more harm than good. “It would push people into bankruptcy who don’t need to go into bankruptcy. A homeowner can get a mortgage modification by making a phone call,” Mr. Bartlett said.

With the swearing-in of the new president, it appears the trade groups are preparing for the worst and developing a fallback strategy.

If passage of bankruptcy cramdowns is politically unstoppable, then the industry wants bankruptcy to be a “last resort” for borrowers facing foreclosure who cannot be helped by any loan modification or workout plan. “It has to be done responsibly so it doesn’t overwhelm the bankruptcy courts, doesn’t crater the securities market and further drag down the market value of housing,” said Philip Corwin, a partner at the law and lobbying firm of Butera & Andrews, who also is outside counsel to the American Bankers Association.

“Bankruptcy should only be for people who are facing real foreclosure because they just can’t make their payments even with a FDIC-type modification,” he said.

Whereas, bills introduced in the House and Senate could open the door for 20 million homeowners with underwater mortgages to file for bankruptcy, Mr. Corwin said. He warned that a lot of people will take that offer. “And that will be a disaster.”