As other types of risk mitigation continue to multiply, an executive whose company helps investors build value by rewarding borrowers for continuing to pay on underwater assets says that his firm’s strategy continues to quietly gain traction.
Loan Value Group managing partner Frank Pallotta says last month an unnamed mortgage insurer became the second MI to use the company’s main reward program.
He said while he could not divulge the specifics of how they were applying it, he could say that its use was broadly typical in that the rewards were being offered to three types of consumers: high-risk current borrowers, borrowers with recently modified loans, and borrowers with spotty payment histories.
Pallotta said all MIs have shown interest in the program, as it gives them a means of fighting recissions without relying on servicers and without “touching the note.”
He said such programs tend to be more successful in targeting borrowers that can or may be able to pay rather than those with inordinate distress in most cases, so other public and private programs are needed.
However, Pallotta said investors he works with have indicated that from their perspective, some look more favorable than others.
He said he like many has heard some private market concern about recent proposed use of eminent domain.
Interestingly, he said he finds that whether or not this is actually used to seize and write down first liens, the possibility that it could be has heightened interest in mitigating second-lien risk.
“I do talk to people who sell second liens, and they say this would be a disaster” because it would effectively wipe out the second on the first-lien that was seized and written down, Pallotta said.
“They’re not selling them, because the bids have been bottom-feeder bids for some time,” he said.
Loan Value Group has suggested the best alternative next to a par payoff would be to begin a process of
“We’ve seen a nearly 500% increase in curtailments” on second liens where the borrower has been offered rewards through the company’s program, Pallotta said.
Another eminent domain concern is that, “people who are holding private-label securities” fear they “would suffer massive losses,” he said.
Another recent risk mitigation effort Pallotta said he has been hearing about has been the Federal Housing Finance Agency’s program in which Fannie Mae and Freddie Mac will offer up to $6,000 to second lien holders to expedite a short sale.
Some deeply discounted second lien holders might take the government-sponsored enterprises up on the offer, but “most second liens are current and most second liens are held by banks.” So, second lien holders in these categories probably will not be motivated by a $6,000 payment for a $50,000 asset, for example.
Pallotta said he favors any form of risk mitigation that reduces concerns linked to underwater loans.
“Whatever gets the problem smaller, let’s chip it away,” he said, but noted that he remains concerned that the problem still seems to be growing even as means of risk mitigation continue to multiply
By offering programs that generally reward borrowers for making payments when they can to mitigate a variety of types of mortgage risks, Pallotta sajd, “We are trying to solve for as many variables as possible.”
