By HOLDEN LEWIS
April 19, 2007
It wouldn't hurt to ask the right people. On April 17, the House Financial Services Committee held a hearing called, "Possible responses to rising mortgage foreclosures." Of a dozen witnesses, none were mortgage servicers - the people whose companies collect mortgage payments, deal with delinquent debtors, and initiate foreclosures. The committee didn't call any lenders, either.
Instead, the committee called a regulator, the federal housing commissioner, the heads of Fannie Mae and Freddie Mac, several nonprofits, and two banking and securities lobbyists. This broad array of people agreed on one thing: This ain't your grandfather's mortgage industry. The business is so extraordinarily complex now, so decentralized, that it's hard for anyone to reduce foreclosures, no matter how fervently they wish to do so.
According to the Mortgage Bankers Association, 119 out of every 10,000 home loans were at some step in the foreclosure process at the end of last year. That's an increase over previous quarters, but not a record. On the other hand, 54 out of every 10,000 home loans entered the foreclosure process during the last three months of 2006. That is a record - the previous record, at the end of a recession in 2002, had been 50 new foreclosures for every 10,000 loans.
The foreclosure problem is bound to worsen, and members of Congress are looking for fixes.
"There are no easy market solutions," David Berenbaum, executive vice president of the National Community Reinvestment Coalition, told the committee. He suggested a government solution instead: a mandated temporary halt in foreclosures. Too many law firms and mortgage servicers rush consumers into foreclosure without assessing their ability to refinance or catch up on their payments, he said.
A mortgage servicer might have responded by asking who would pay the accumulated interest payments during a moratorium. For example, if a six-month halt to all foreclosures merely delayed a consumer's foreclosure for six months instead of preventing it, that homeowner would rack up seven months of unpaid interest charges instead of one month. Who would be responsible for paying the extra amount: the servicer, the investors who own the loan, the borrower? If it's the latter, is that fair? Or would the taxpayers pick up the tab?
Proponents of a foreclosure moratorium say it would give borrowers time to refinance if possible, and would give servicers time to modify loans. Mortgages can be modified in different ways: The interest rate can be reduced, payments can be suspended until the borrower finds a job, or missed payments can be caught up over time or tacked onto the end of the loan.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., explained that in days of yore, "lenders often worked with troubled borrowers to restructure their loans or find other ways to avoid foreclosure. Today, the growth of securitization in the subprime mortgage market has complicated the ability of interested parties to apply flexibility and creativity to assist borrowers facing difficulty."
Most mortgages are sold to an issuer, which packages hundreds or thousands of loans into pools. Each pool of loans is securitized, meaning that bonds backed by the loans are sold to investors. When mortgages are securitized, they are chopped up and thoroughly mixed together. Modifying a loan in a securitized pool is like extracting a teaspoon of sugar from cupcake batter.
"Once the lender has sold the mortgage to the issuer, the lender no longer has the power to restructure the loan or make other accommodations for its borrower," Bair said. That power resides with the servicer, but "the servicer can only do what the securitization documents allow it to do."
Oftentimes, those contracts make it nearly impossible to modify more than 5 percent of the loans in the pool. Loans can't be modified until the borrower is at least a month past due. Tax laws and accounting rules restrict servicers' flexibility, too.
George Miller, executive director of the American Securitization Forum, warned that "policies designed to further regulate subprime lending or provide relief to borrowers" could cause investors "to shun the market altogether and cut off mortgage credit for worthy subprime borrowers."
The heads of Fannie Mae and Freddie Mac, which buy and securitize loans but don't underwrite mortgages directly, promised to expand programs to help homeowners refinance out of high-rate adjustable-rate mortgages and into fixed-rate loans. The changes won't be rolled out until later this year, and Fannie's program is for people who haven't had a late payment in the previous 12 months. That won't help borrowers who are facing imminent foreclosure.
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