Mortgage Investors Shun Program Requiring them to take Substantial Losses

The much talked about Hope for Homeowners program (also called "H4H"), with $300 Billion in potential funding has been a miserable failure due to the fact that big banks and pooled mortgage investors are not signing on. Smaller lenders that have signed on have only modified a few loans within the program.

Most CDO's or MBS pools have contractual limits  as to how many loans in the pool (typically 3-5% of all loans) can be modified without investor approval.  Investors are still unwilling to recognize losses, perhaps waiting for some kind of economic miracle to stabilize housing prices near current levels, or because there are more/better tax advantages available to investors by letting the mortgages go to foreclosure, rather than modifying the loans.  There is also the possibility of litigation by  

As long as the the Feds do not buy the pools and take the financial hit from TARP funds, the existing investors will fight participation in any program like H4H. Participation would mean taking current losses (reductions in outstanding mortgage balances on first and second loans to 90% of current market values) that would be necessary in the bubble areas to keep borrowers in their homes. It seems writedowns will not happen until the Feds mandate participation by all lenders and investors.

The position of investors should not be a surprise given the tepid language of the TARP legislation related to H4H. Unless or until there is specific, mandated participation in the plan, there will be little or no participation.  

A moratorium on foreclosures might put pressure on lenders to do something other than collect late fees. California is considering a moratorium on foreclosures at the state level as I write because of thousands and thousands of new foreclosures coming.
 
From my perspective as a consumer, the unwillingness of investors to recognize losses now will only increase the severity of the losses that will be recognized going forward.  Adjustable rate resets on A and Alt-A mortgages are beginning to kick in and will continue until 2011 and the dollars involved represent a bigger problem than Sub-Prime mortgages did. 

According to the industry publications and media coverage I have seen, Loan Modifications have been effective for more than 5%, but less than 20% of problem loans. While this data is not scientific, it indicates that the number of Loan Modifications occuring without Federally mandated, specifically formulated compliance will not solve the problems on the borrower side of the equation. 

In speaking with several people who are in the business of trying to do Loan Modifications for borrowers, there are still very few modifications being made with meaningful fixed rate reductions for the full term of the loan and almost no principal reductions being made.  Reducing or fixing the rate on a loan for 2-7 years just pushes the problem into an uncertain future.  In the absence of strict federal formulas and guidelines of modifications, the strategy of the moment for lenders is to do as little as possible to terms in the vague hope that a solution on the borrowers side will appear in a year or two.

It seems that the underlying issue of affordability is simply not going to be addressed except by tragedy in the marketplace at the expense of and potential ruin of millions of homeowners. This includes all borrowers, whether they told the truth on their loans or did not, paid a big downpayment or had no downpayment, had fixed or variable loans and were either always late or never late on their payments. A cynic might attribute this strategy by lenders and investors to a reliance on more Federal Bailouts. Why pay the piper yourself when you can get the taxpayers to shoulder the burden?

The real underlying housing issue is affordable pricing ( a function of strong employment at decent wages) and sustainable loan terms. If the economy stays in a long term recession, home prices will continue to deflate until they reach a level that creates demand from buyers.

Lenders Setting Tough Standards for Modification

You can only get a Loan Modification if your "DTI", Debt to Income ratio satisfies your lender as calculated under the modified terms.  Each lender has a maximum DTI they will accept and each DTI on a modified loan includes more borrower expense items than the DTI's used by underwriters in recent yearson new loans .

In other words, you have to have sufficient income to pay the modified loan payments and expenses at a level acceptable your lender and you must adequately qualify for the modified loan, including employment, asset and income verification.  If you cannot verify these, it is very unlikely that you will successfully get a modification, with the possible exeption of a loan where the original documentation included egregious violations of RESPA or TILA, or a loan where the servicer cannot find the original note or there are recording issues of the title and the borrower is represented by a third party that knows how to negotiate accordingly.

It is important for borrowers to understand that a lender may not find expenses like keeping 3 kids in private school or an $1000.00 per month lease payment on a Mercedes or a $200.00 per month Cable TV bill as necessary expenses.  If your credit cards are maxxed out, you must either pay them down or off or work with a professional credit manager to get the balances in line with your verifiable income. 

According to the owner of one of the largest local real estate sales franchises in my area of Southern California, the big lenders simply do not want to deal with third parties trying to negotiate Loan Modifications on behalf of borrowers.  This may be a reflection of the fact that they are not required by legislation to do so, or a reflection of the level of sophistication of the Loan Modification/Loss Mitigation companies out there representing borrowers, or both. 

Increased unemployment is only adding to the problems for upside down homeowners in bubble areas. More unemployment will mean more foreclosures and a downward price spiral in affected areas. 

If consumers cannot get their elected representatives to force participation in programs like H4H that mandate markdowns or reductions in mortgage principal balances, there won't be any. I found two well written articles by Diana Golobay on the program at: http://www.housingwire.com/2008/10/31/questions-emerge-h4h/ and http://www.housingwire.com/2008/11/04/mid-tier-lenders-shut-out-of-hope-for-homeowners-sources-say/.

I've also found a couple of other good articles on related topics:

Next Steps to Resolve the Mortgage Crisis
http://www.americanprogress.org/issues/2008/10/next_steps.html

Housing Fundamentals
http://www.americanprogress.org/issues/2008/10/housing_fundamentals.html

Trapped Homeowners
http://www.suntimes.com/business/savage/1230693,CST-FIN-savage20.savagearticle

Just remember that real political support for borrowers concerns and meaningful legislation will only take place if borrowers unite and contact their elected representatives with their concerns.