Recently I chaired the SourceMedia Loan Modifications Conference in Dallas.
It was a hot topic and a hot show. The conference keynote from Mary Coffin of Wells Fargo was notable for its candor and I enjoyed moderating a lively peer-to-peer collaborative discussion on the first afternoon of the show.
Here's what I told the attendees to kick things off at the Westin City Center:
There can be few more important topics for both the industry and the nation than the success or failure of the current loan modification effort being undertaken by the Treasury Department and servicers all around the country.
Remember, it was only a couple of years ago that loan modifications were a very small part of a servicer's default options. Foreclosures, REO sales, even short sales all were more common.
And that lack of familiarity with loan mods showed when lenders first tried to employ them in order to cope with the massive waves of delinquencies and defaults that swept over them as a result of the market disruptions of 2007 and 2008. Disastrous results of up to 60% redefaults were common as many restructurings actually caused borrowers' monthly payments to increase. That wasn't working. It was clear a new approach was needed.
What are industry best practices as far as loan mods are concerned? You have about three good options - lengthening the term of the loan, say to 40 years, to decrease the payment, reducing the interest rate of the loan, or actually reducing the principal amount. Over the past year many have conjectured that you will need to do two of the above, or maybe even all three, to have a successful modification.
Enter the federal government, with its ambitious HAMP program to do MILLIONS of loan mods to try to derail the foreclosure flood that has hurt our national economy and contributed to the swoon in home prices that has sapped home equity and contributed to reductions in the home sales markets, especially new home sales. The jury isn't in on HAMP yet by any means, as the 500,000 number that gets thrown around actually refers to trials underway to see if borrowers can qualify for a mod. Very few real mods have yet been undertaken. And while anything below a 60% redefault rate will be an improvement on private efforts, would a 30% redefault record, say, be considered a success? And is the HAMP method, with its fairly rigid guidelines, the right formula for success?
And while loan mods are currently the biggest buzzwords in the mortgage industry, there are other topics to be considered. Can effective loss mit strategies keep at-risk borrowers from defaulting? Are short sales a good alternative? Will interest rates remain favorable enough to induce refinancings from those that are financially able to do so? And can the fraudsters migrating from the originations side of the business to the servicing side be prevented from causing even more mayhem?
Finally, there's a huge factor that some people have been studiously avoiding thinking about. And that's the steady increase of unemployment, up to about 10% nationally currently and universally thought to only be getting worse before it gets better. A layoff can crater the best-managed modification and signal yet another foreclosure and yet another REO sale into a glutted market. When will the national jobless rate start to recover and support the efforts smart servicers are making to protect their assets?
Luckily, the Loan Modifications Conference has assembled an incredible faculty to address questions like these and others. We have an impressive array of lenders here who will talk about their experiences and their informed speculation on how the market will act going forward, as well as an economist from Freddie Mac who will peer into the cloudy crystal ball of prospects for our national economy.
