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Recently in Loan Modification Category
If you have a loan owned or serviced by Bank of America and are 60 days late or more, you MAY for its new "earned principal forgiveness." About 95% of the loans that Bank of America services for private investors in which the investor has delegated authority to the bank may qualify. The types of loans that may qualify include pay option ARMs, prime two-year hybrid mortgages and subprime loans initially offered by Countrywide. Fannie Mae and Freddie Mac loans will not be eligible.
B of A estimates that only 45,000 customers will ultimately qualify for this program and about $3 billion dollars of principal will be reduced provided all the customers accept and complete the program over a 5 year tern and the value of the home does not rise after the third year.
This "earned principal forgiveness" program will be offered as part of Bank of America's National Homeownership Retention Program, which is available in 44 states and the District of Columbia. To qualify for this principal forgiveness, homeowners will need to meet all the other qualifications of HAMP. They will need to prove that they have a hardship and cannot afford their current mortgage.
Details:
- If you have a pay option ARM the bank will first look at your negative amortization account. With these loans borrowers were able to defer interest payments and these payments are held in negative amortization accounts. As part of the HAMP modification, the bank will eliminate this feature and forgive all or part of the negative amortization to reduce principal to as low as 95% loan to value (LTV).
- Also, pay option ARMs will be recast to eliminate the negative amortization and converted to fully amortizing loans.
- Next if the principal balance of the loan is greater than 120% LTV the bank will consider a set-aside of up to 30% of the principal as an "interest-free forbearance of principal." The amount set aside interest-free will be eligible for possible forgiveness.
- In addition to pay option ARMs, some prime two-year hybrids and Countrywide mortgages will be included in this program.
- As long as you pay your loan on time during a five year period, it's possible all the interest-free principal that was set aside will be forgiven. Whether or not all is forgiven will depend on the value of your home in the fourth and fifth year.
- http://webmedia.bankofamerica.com/corporateresponsibility/NHRP%20Enhancements%20Fact%20Sheet.pdf
Take the example of a home now worth $200,000 but with a mortgage of $250,000. In this scenario $50,000 would be set aside as an "interest-free forbearance of principal." In determining the HAMP payment the bank would use a $200,000 loan-to-value to set the new mortgage payments.
As long as homeowners continue to pay the loan on time over a five-year period, each year one fifth of the "interest-free" principal set aside would be forgiven. So, for example, at the end of the first year $10,000 would be forgiven. This will continue each year as long as the forgiven amount does not reduce the principal below 100% of the current market value.
But in years four and five, if the market value has recovered, some of the principal may not be forgiven. For example, suppose in year 4 the house price has appreciated $20,000 and now the house is worth $220,000, the remaining $20,000 sitting in the "interest-free" account would not be forgiven.
On a side note: Bank of America Corporation on April 16, 2010 reported first-quarter 2010 net income of $3.2 billion compared with a net loss of $194 million in the fourth quarter and net income of $4.2 billion a year earlier. After preferred dividends, the company earned $0.28 per diluted share in the first quarter, up from a loss of $0.60 per share in the fourth quarter and earnings of $0.44 per share in the first quarter of 2009.
Sources: Lita Epstein, Bank of America
Pulled off of Bloomberg today, this article relates to loan mods given prior to the implementation of the Home Affordable Mortgage Program or HAMP.
March 25 (Bloomberg) -- More than half of U.S. borrowers who received loan modifications on delinquent mortgages defaulted again after nine months, according to a federal report.
The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report today. The figure, which measures payments at least 30 days late, climbed to 57.9 percent for changes made in the prior 12 months.
U.S. homeowners are struggling to make payments as depressed housing prices leave them owing more than their properties are worth. About 24 percent of properties with a mortgage were underwater in the fourth quarter, First American CoreLogic said last month. The median price of a U.S. home was $165,100 in February, down 28 percent from its peak in July 2006, according to the National Association of Realtors.
Modifications are "clearly not working well and it's not a surprise," said Sam Khater, a senior economist at First American CoreLogic in Tysons Corner, Virginia. "It's pointless to rewrite these loans because they're underwater."
The number of homes with mortgage payments at least 60 days late climbed 2.39 million in the fourth quarter, up 13.1 percent from the prior three months and 49.6 percent from the year earlier period, the quarterly Mortgage Metrics report said.
Obama Program
President Barack Obama's administration is pressuring lenders to alter loans to reduce the number of properties lost to foreclosure. About 4.5 million foreclosures filings are expected in 2010, according to RealtyTrac Inc., an Irvine, California-based seller of default data.
A government watchdog report released today criticized the government's main foreclosure prevention effort, the Home Affordable Modification Program, or HAMP, for "spreading out the foreclosure crisis" over several years by failing to help enough troubled borrowers.
"The program will not be a long-term success if large amounts of borrowers simply re-default and end up facing foreclosure anyway," said the report by the Special Inspector General for the Troubled Asset Relief Program, prepared for a Congressional hearing today.
Assistant Treasury Secretary Herb Allison defended the program at the Congressional hearing, saying it has shown signs of stabilizing the housing market.
Before HAMP
The Mortgage Metrics data are based mostly on modifications made before HAMP, Joe Evers, deputy for large bank supervision at the Comptroller of the Currency, said in a phone interview today. Permanent loan changes under the government program accounted for only 21,000 of the total 594,000 modification plans initiated during the fourth quarter of 2009, making it too soon to evaluate the effectiveness of that plan, Evers said.
There were 168,708 delinquent loans permanently modified under HAMP as of the end of February, according to a Treasury Department report March 12.
Borrowers were more likely to default when their monthly payments aren't reduced enough in modifications to make staying in a home affordable, Evers said.
"Our data show that when you reduce payments by 20 percent or more you have a tendency for lower re-default rates," he said from Washington.
Bank Modifications
The Mortgage Metrics report tracks 34 million mortgages with an outstanding balance of $6 trillion and is based on data from nine national banks and three thrifts. The data represent more than 64 percent of all first-lien mortgages.
Modified loans in the portfolio of banks -- as opposed to loans owned by investors or government-sponsored enterprises such as Fannie Mae and Freddie Mac -- had the best record of avoiding re-default, the Mortgage Metrics report said.
The banks are free to design modification plans for individual borrowers, Bruce Krueger, a mortgage banking expert with the Office of the Comptroller, said in a phone interview. The HAMP program requires lenders to follow a path of concessions to modify loans, beginning with interest rate reductions, extended loan terms and principal forebearance.
"It's a very rigid process," Krueger said of the HAMP program. "If the loan is on the bank's books itself, the servicer can do whatever the bank might allow."
To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net.
Commentary from the frontlines: Follow the money! There is inherent conflict of interest between what is good for a loan servicer and what is good for the loan's owner or investor (typically a mortgage backed security trust). Loan servicer's usually only make .25-.50 percent of the revenue that they process on behalf of an investor when a loan is performing. However, when a loan goes into default, servicer's make a killing. Loan servicers profit from the late fees, BPOs, foreclosure costs, attorney fees, forced placed insurance and all the other excessive fees.
Payments received from borrowers during a trial mod or forbearance plan are put in a "suspense account". Suspense funds earn interest for the loan servicers. Those funds are used to pay off the accrued servicer fees first and foremost. Generally, investors get paid after the loan servicer. So as not to disturb the cash flow to the servicers, MBA proposes that the government make special loans to servicers so they can pay themselves and also let their investor's share in the foreclosure crisis gravy train. The proposal would effectively double the time that servicer's can milk a property in foreclosure, in addition to the HAMP plan, and allows investor's to further delay recognizing the true losses on their books.
Of course, as with the HAMP plan, evaluation of borrowers would be under the supervision of the loan servicers.
the fox is watchin' the unemployed chickens too?
Proposal details: http://www.mortgagebankers.org/files/News/InternalResource/71954_BridgetoHAMP.pdf
"The Mortgage Bankers Association (MBA) has put forth a concept for a new forbearance program that would allow borrowers who've lost their jobs to remain in their homes while they seek new employment. According to the proposed program, loan servicers would reduce the borrower's mortgage payment for up to nine months while the homeowner looks for employment."
"Under MBA's proposal, borrowers would be initially evaluated for the forbearance program using a model that assumes the borrower will be reemployed within nine months and earning 75 percent of their previous salary. The borrower would be reevaluated as to employment and income status every three months for a total forbearance of nine months. Once new employment is secured, the program would serve as a "bridge" for the borrower to be considered for a modification under the administration's Home Affordable Modification Program (HAMP)."
"MBA suggests that some participating servicers would need access to special loans through Treasury so they could continue to advance payments to investors during the extended forbearance period. The trade group also noted that the program would need to be voluntary and flexible due to financial accounting considerations, in particular whether or not lenders would have to classify the forbearance as a troubled debt restructuring (TDR). MBA created this program through a special task force of its members, and consulted with Fannie Mae and Freddie Mac on the design. Last week, MBA representatives met with officials from the White House, the Treasury Department, and HUD to present the proposal."
"Last Friday, President Obama announced a new initiative to provide $1.5 billion to housing finance agencies in especially hard-hit states for them to develop their own loss mitigation programs, with one particular area of focus being assistance for unemployed homeowners. MBA's proposal though, puts the unemployment issue on the national stage, and although participation by servicers would be voluntary, the program would be coupled with federal HAMP efforts. Nationwide, MBA said in a letter to Treasury Secretary Timothy Geithner, "Over the last year, we have seen the ranks of the unemployed increase by about 5.5 million people, increasing the number of seriously delinquent loans by almost 2 million loans and increasing the rate of new foreclosures from 1.07 percent to 1.42 percent."
I can tell you from the frontlines of the foreclosure crisis, that the Obama administration's Home Affordable Modification Plan or HAMP is a large scale failure. Consider these facts from the ACORN and the Center for Responsible Lending:
-A family loses their home to foreclosure every 13 seconds.
-15 million homeowners owe more than their mortgages are worth.
-9 million foreclosures by the end of 2012 resulting in a $2 trillion loss in home property values in the United States. With millions of option ARMs and Alt-A loans scheduled to reset in the next few years, coupled with rising unemployment, the projected numbers are likely to only get worse.
"Mortgage servicing companies are key to addressing the foreclosure crisis because they occupy the unique niche of collecting payments and making decisions about foreclosures on behalf of investors who own pools of mortgage backed securites. Unfortunately, most workouts offered by servicers are not aff ordable to the homeowner, and many even fail to lower the monthly payment that led to the delinquency, thereby resulting in high re-default rates."
If you are reading this Blog, then chances are you have already failed in your attempts to get a loan modification. Consider the reasons why the HAMP program is not working:
Mortgage servicers remain severely understaffed and are not complying with the HAMP contracts they signed.
HAMP requires servicers to suspend all foreclosure activity until it canbe determined if a homeowner is eligible for a modification; instead, servicers are proceedingwith foreclosures before such determinations are made. In direct violation of the guidelines, some servicers also continue to
1) require homeowners to make large, up-front cash payments as a condition for being considered for a modification;
2) fail to apply the HAMP rules to all portfolios being serviced;
3) refuse to evaluate for HAMP modification those distressed homeowners currently paying on time;
4) base the affordability calculations on interest-only or option-arm minimum payments, when HAMP requires affordability to be based on the loan's principal interest, taxes and insurance; and
5) neglect to offer principal forbearance when interest rate reductions are not enough to make the loan affordable.
Source:
http://www.acorn.org/fileadmin/Fair_Housing/Reports/HAMP_WhitePaper3.pdf
Does this sound familiar? The HAMP contract is an agreement between the Treasury Department and the individual loan servicers. Currently, a borrower has no clear private cause of action or right to sue a servicer if they fail to play by the rules. Only the Treasury is in a contractual position to pressure the servicers into compliance and so far, that pressure has been quite mild. Its a classic case of the Fox watching the Chickens.
The HAMP program will never succeed unless the Obama administration creates a strong disincentive for the servicers that ignore the HAMP guidelines. The obvious solution is to create a private cause of action and enable borrowers who have been denied due process under the HAMP, to sue, to have their day in court, to seek justice. Let the law dawgs out, Mr. President!
Source: http://www.acorn.org/fileadmin/Fair_Housing/Reports/HAMP_WhitePaper3.pdf
Through December 2009, out of the 1,164,507 trial mods offered to date, only 6% or 66,465 homeowners received permanent loan mods under the HAMP plan. However, the government claims that an additional 46,000 permanent offers are awaiting borrower acceptance as a result of the the Treasury departments increased pressure on servicers.
Source: http://financialstability.gov/docs/report.pdf
Approximately 89% of eligible mortgage debt outstanding is covered by HAMP participating servicers. During the 4th quarter of 2009, the number of servicers who have signed servicer participation agreements to modify loans under HAMP rose from 63 to 102.
WARNING: Keep in mind that not every investor or loan pool within a servicer's portfolio necessarily signs up for the HAMP plan. Investors can opt out on an individual basis.
National HAMP results:
Number of Trial Period Plan Offers Extended to Borrowers (Cumulative): 1,164,507
All HAMP Trials Started Since Program Inception: 902,620
All Active Modifications (Trial and Permanent): 853,696
Active Trial Modifications: 787,231
PermanentModifications: 66,465
Permanent Modifications Pending Borrower Acceptance: 46,056
Total Permanent Modifications Approved by Servicers: 112,521
California HAMP results:
Active trial mods: 158,935 [20% of national total]
Permanent loan mods: 13,353 [20% of national total]
Los Angeles-Long Beach-Santa Ana HAMP results:
Active trial mods: 45,945 [29% of state total]
Permanent loan mods: 3,469 [26% of state total]
Riverside-San Bernadino-Ontario HAMP results:
Active trial mods: 36,671 [23% of state total]
Permanent loan mods: 3,383 [25% of state total]
From the front lines: This is a timely and informative article on the likelihood of principal reduction for borowers in distress. Wells Fargo and its subsidiary Wachovia remain the most willing, having cut $2billion of principal in 2009. While permanent loan modifications results are weak, principal reduction remains extremely rare. Principal deferment may help but doesn't solve the long term problem. 2009 total principal adjustments were only 21,000 out of nearly 7 million families that are behind on their mortgages. The conflict between first and second mortgage holders willingness to share the losses remains a stumbling block. Further incentivizing lenders with tax payer subsidies is not the answer. It will be a long slow slog to the bottom of the housing market unless Congress provides homeowners the leverage they could gain over lenders by reforming the bankruptcy cram down rules.
Principal Cuts on Lender Menus as Foreclosures Rise (Update1)
By John Gittelsohn and Prashant Gopal
Jan. 7 (Bloomberg) -- Efforts by U.S. banks to help distressed homeowners have focused mainly on temporary fixes such as interest-rate reductions that may only put off the day of reckoning, despite policy makers wanting them to do more.
Banks may be forced to resort to a remedy they've been trying to avoid -- principal reductions -- as another wave of foreclosures looms and payments on risky loans rise, Bloomberg BusinessWeek magazine reports in the Jan. 18 issue.
While interest-rate reductions or extending loan terms reduce homeowners' monthly payments, they don't give much comfort to borrowers who owe more on their homes than their properties are worth. Borrowers who don't have equity in their homes are more likely to hand over the keys when they run into trouble. "The evidence is irrefutable," Laurie Goodman, senior managing director of Amherst Securities Group in New York, testified before the U.S. House Financial Services Committee on Dec. 8. "Negative equity is the most important predictor of default."
The 25 percent plunge in residential real estate prices from their 2006 peak has left homeowners underwater by $745 billion, according to research firm First American CoreLogic -- a number that tops the government's $700 billion bailout for banks. That's why Federal Deposit Insurance Corp. Chairman Sheila Bair is considering incentives for lenders to cut the principal on as much as $45 billion of mortgages acquired from seized banks. "We're looking now at whether we should provide some further loss-sharing for principal writedowns," says Bair. "Now you're in a situation where even the good mortgages are going bad because people are losing their jobs."
Deepening Crisis
The foreclosure crisis is likely to deepen this year in part because payments on many adjustable-rate mortgages are set to balloon. Unless there's a sharp recovery in property values or a change in lenders' willingness to cut principal, at least 7 million borrowers currently behind on their payments will lose their homes, Goodman estimates.
Some lenders may be coming around to the idea of principal reduction. "If you can right-size the mortgage and return to an equity situation, the incentive is to stay," says Micah Green, an attorney at Patton Boggs in Washington and a lobbyist for a coalition of mortgage bond investors. Banks can either forgive principal outright or defer it. In deferrals the borrower must pay back the full amount on the original mortgage when he sells the property; if the ultimate sales price doesn't cover the principal, the homeowner has to pay the difference, making it a less effective tool.
Deferring Principal
A principal deferral helped Marcus Beckett stave off foreclosure. The 42-year-old small-business owner couldn't afford his $2,413 monthly mortgage bill after his income dropped and his son, Riley, was born. In October, OneWest Bank agreed to defer $66,000 of the $423,000 debt on his two-bedroom condominium, which he'll have to pay back if he sells his Aliso Viejo, California, home. The monthly tab on the house he bought in 2006 is now $1,314. "It's like I got a second chance on life," Beckett says. "I feel, mentally, I'm able to keep making payments."
While principal reductions remain rare, banks are doing them more often. In the third quarter of 2009, some 21,000 home loans -- 3 percent of the total modified mortgages -- included a principal reduction or deferral, according to Mortgage Metrics, a government publication. That's up from 6,245 in the first quarter of 2009, the first time the U.S. reported the data.
Positive Results
Banks that negotiate principal reductions have seen positive results. Last year, Wells Fargo & Co. cut $2 billion of principal on delinquent loans. After the modifications, the six- month re-default rate on those loans was roughly 15 percent to 20 percent. That's less than half the industry average. "We are very comfortable with what we've been doing," says Franklin Codel, chief financial officer of the bank's home-lending unit. "We offer a principal reduction if that makes sense for that individual borrower's situation."
When principal reductions were granted for pay-option adjustable-rate mortgages -- loans with high default rates because they enabled borrowers to pay less than the cost of interest as the principal increased -- the re-default rate after 60 days fell to 6 percent, according to Mortgage Metrics.
"In terms of incentive, you have more skin in the game or less negative equity to deal with," said Fred Phillips-Patrick, director of credit policy for the Office of Thrift Supervision.
Demand Better Deals
Many banks don't want word to get around that they reduce principal. They fear that homeowners who can afford their payments will demand better deals. John Lashley, a 44-year-old salesman in Huntersville, North Carolina, is making his payments. But he is thinking about walking away from his four- bedroom home unless his lender, Sun Trust Mortgage, agrees to cut the principal on his $345,000 loan.
The house next door recently sold for $260,000, and Lashley doesn't see the point of pouring money into his house when he may never recoup the investment he made in 2007. "Why should I stay in my house?" he says. "It's not a moral decision. It's a financial decision."
The conflicting interests of mortgage lenders and home- equity lenders is a roadblock to doing principal reductions. Banks, credit unions and thrifts held $951.6 billion in home- equity loans as of Sept. 30, according to Federal Reserve data.
Dueling Interests
Mortgage lenders don't want to cut principal unless the home-equity lenders agree to take a hit. Typically, though, the home-equity lenders are reluctant; much of the value of their loans would be wiped out. That could drive more banks into insolvency, says Joshua Rosner, an analyst at investment research firm Graham Fisher in New York.
The threat of lawsuits is also hampering principal reductions. In December 2008 money manager Greenwich Financial Services sued lender Countrywide Financial in New York State Supreme Court. Greenwich, which owns mortgage-backed securities, demanded 100 cents on the dollar for some Countrywide investments. The securities included loans on which Countrywide had agreed to cut $8.4 billion in principal and interest to settle allegations of predatory lending.
Greenwich Financial's case is pending. Bank of America Corp., which bought Countrywide in 2008, says: "We are confident any attempt to stop this program will be legally unsupportable." Greenwich says it's willing to accept loan changes that benefit borrowers.
No Pressure
So far the feds haven't put pressure on banks to forgive debt. President Barack Obama's $75 billion program to spur banks to alter loan terms doesn't require them to do so. But the FDIC and other regulators are looking at measures to promote the writedowns. Mark Zandi, the chief economist for Moody's Economy.com, who has testified before Congress on housing issues, proposes that banks receive a federal match of $1 for every $2 in principal reductions they offer to homeowners who were victims of predatory lending practices. "You're not going to wipe out all the borrowers' negative equity," he says. "This just gives them enough hope to get them committed again."
To contact the reporters on this story: Prashant Gopal in New York at pgopal2@bloomberg.net; John Gittelsohn in New York at johngitt@bloomberg.net.
By Professor Jean Braucher
Jean Braucher is the Roger C. Henderson Professor of Law at the University of Arizona James E. Rogers College of Law. This article is based on a longer paper, available for free at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1518098).
The Obama Administration originally envisioned bankruptcy modification as a companion to HAMP. The House passed a bill to achieve that goal, only to see it stall in the Senate. An attempt to get the legislation moving again in the House failed on December 11, but the more problems with HAMP become apparent, the greater the chances that bankruptcy modification might ultimately be enacted.
Low quantity. Only 31,382 modifications were made permanent in the first eight months of HAMP, which became operational last April and committed $75 billion to help three to four million borrowers avoid foreclosure. In response to these poor results, Treasury launched a "Conversion Campaign" to get as many as possible of another 697,026 pending trial plans converted into permanent ones.
Comparing the permanent modifications at the end of November to the 386,865 trial plans at the end of August (giving them three months to become final), the conversion rate has been about eight percent, equivalent to chances of a college applicant getting into Harvard or Yale.
A Treasury official used police and military rhetoric to describe its campaign: "SWAT teams" of Treasury staff are now "imbedded" at servicers in an "escalation process." So if you have clients who could benefit from HAMP modifications, now is a good time to contact the program's "Hope Hotline": 1-888-995-HOPE (4673).
Treasury also acknowledged persistent accounts of servicers "losing" documents and asks borrowers and their counselors to report program violations. That's another action item for you if you have clients who have been given the runaround. Other servicer violations should also be reported, such as conducting foreclosure sales while reviews or trial plans are in progress, charging for evaluation, or offering noncomplying plans that are more expensive than HAMP calls for. Gross monthly mortgage payments are supposed to be reduced to 31 percent of gross monthly income. Any of these practices could make a good basis for state Unfair and Deceptive Practices (UDAP) actions, typically carrying statutory damages and attorneys' fees.
Low quality. Principal reduction is not required under HAMP and is rarely given. Three-quarters of borrowers are left underwater, often seriously so, with the principal obligation on average at 137 percent of the home's current value, according to the Congressional Oversight Panel report last October. Borrowers who later lose income are stuck, unable to sell and pay off the loan or refinance. Temporary interest rate breaks are the way affordability is achieved, without principal reduction, and that creates high risk of redefault, especially given high unemployment.
The Obama Administration originally envisioned bankruptcy modification as a companion to HAMP. The House twice passed bills to achieve that goal, only to see them stall in the Senate. An attempt to get the legislation moving again in the House failed on December 11, but the more problems with HAMP become apparent, the greater the chances that bankruptcy modification might ultimately be enacted.
Alternatively, HAMP's guidelines could include principal reduction as a standard tool when needed to keep borrowers in their homes, something Treasury could implement itself. As is, many HAMP modifications are not going to be sustainable.
The judicial mortgage modification amendment supported by NACBA in the House of Representatives failed on a 188-241 vote on Friday, December 11, 2009. Oddly, similar legislation passed the House earlier this year on a 224-191 vote. Today, 50 Democrats who had voted in favor of H.R. 1106 switched their position and voted against the judicial mortgage modification amendment. You may find that as baffling as I do, particularly given all the evidence that the voluntary loan modifiation program is not working and the escalating foreclosure crisis. The bottom line is that some members of Congress serve the financially influential banking industry first and consumers second.
If you want to know how your Member of Congress voted today, go to http://clerk.house.gov/evs/2009/roll963.xml. If you want to compare your Representative's vote today with that on H.R. 1106, go to http://clerk.house.gov/evs/2009/roll104.xml to see their earlier vote. Of course, there were a number of variables associated with the vote that were not a factor in the earlier vote, particularly given that Members also were being asked to vote against the banks by supporting the creation of a Consumer Financial Protection Agency (CFPA). As hard as it may be to believe, some Members just could not vote twice in the same day against the interests of the financial services industry. It is just that simple.
Source: Wall Street Journal, August 2009
http://online.wsj.com/article/SB125166830374670517.html
To encourage banks to pick through the wreckage of their collapsed competitors, the Federal Deposit Insurance Corp. has agreed to assume most of the risk on $80 billion in loans and other assets. The agency expects it will eventually have to cover $14 billion in future losses on deals cut so far. The initiative amounts to a subsidy for dozens of hand-picked banks.
Through more than 50 deals known as "loss shares," the FDIC has agreed to absorb losses on the detritus of the financial crisis -- from loans on two log cabins in the woods of northwestern Illinois to hundreds of millions of dollars in busted condominium loans in Florida. The agency's total exposure is about six times the amount remaining in its fund that guarantees consumers' deposits, exposing taxpayers to a big, new risk.
As financial markets heal and the economy appears to be pulling out of recession, the federal government is shifting from crisis to cleanup mode. But as the loss-share deals show, its potential financial burden isn't receding. So far, the FDIC has paid out $300 million to a handful of banks under the loss-share agreements.
The federal government is on the hook for billions of dollars in bank losses if the economy doesn't recover. It will carry that burden for a long time. Many of the loss-share deals will be in place for up to 10 years.
In most cases, the FDIC agrees to cover 80% of future losses on a big portion of the assets, and 95% on the rest. The FDIC says it doesn't anticipate facing the 95% loss-coverage scenario on any deal.
Some industry officials worry that bankers might tire of the partnerships with the FDIC and put little effort into reworking the soured loans because the bulk of losses will fall to the government. FDIC officials maintain that because banks still have a "material" exposure, they will be reluctant to do this.
"There is certainly an incentive for the banks to play fair and do right, but there is never a limit on the ability of the private sector to shift cost to the government," says John Douglas, a former FDIC general counsel who now advises banks as a partner at the law firm Davis, Polk & Wardell LLP.
Blog comments:
We continue to see the effects of these sweet heart deals given to lenders with inside connections to the government, especially in the case of IndyMac which is now OneWest Bank. Investor's behind OneWest Bank include Obama supporters George Soros, Michael Dell, JC Flowers, John Paulson). Lenders have no incentive to give loan mods where the government has agreed to insure the any losses suffered in foreclosure. Furthermore, OneWest Bank bought up the first mortgages for 75 cents on the dollar and HELOCs for 58 cents. OneWest, like many other banks, makes money on foreclosures. Don't forget, your tax dollars will fund the deficit that the government is creating. Thank you, FCIC.
This an informative article that underscores the problems with the government's loan modification program or HAMP. I can confirm this from the front lines. Converting trial loan mods into permanent loan mods remains a challenge. However, my office's success rate is better than the national average. We are still waiting for the government to use its "full range of authorities" to compel the lenders to complete loan mods. Better yet, give debt lawyers the additional tools to get the job done. A bankruptcy cram down amendment and a private cause of action would produce the leverage needed to complete a higher percentage of loan modifications. J. Arthur Roberts
The administration's big mortgage modification program features $50 billion worth of carrots - but the stick part has been largely absent. Today, the Treasury Department announced it is increasing oversight of mortgage servicers, and made a vague threat of unspecified penalties against companies that don't play by the rules of the loan-mod program.
When pressed on a call with reporters today about what those penalties might be, Assistant Secretary Michael Barr said he didn't "want to get into the details," except that the Treasury would use "the full range of authorities that we have." For now, Barr said, he wanted to focus on pressuring the companies participating in the program to perform better.
The Treasury has focused on publicly shaming the less-effective servicers as its "only tool for accountability," said Diane Thompson of the National Consumer Law Center. She added that it was a "fundamental problem in the way the program is set up," that Treasury does not have a way to adequately punish misbehaving servicers. "It's an open question whether shame is enough."
The administration's program was meant to curb surging foreclosures by encouraging mortgage servicers to modify troubled loans. The program involves a system of payments to servicers, investors, and borrowers to make it in their interest to modify the loan rather than foreclose (something we explained in more depth here). The administration has said that it aims to help 3 million to 4 million homeowners, but the program has been beset by difficulties.
It remains unclear exactly what Treasury's "full range of authorities" are, or how Treasury might exercise them. Take, for example, servicers who appear to be wrongfully denying homeowners modifications (a problem we've highlighted in earlier reporting). The contracts Treasury signed with each servicer in the program allow the government to withhold incentive payments or kick them out of the program. But it's unclear if Treasury would punish that servicer by withholding future loan-mod payments. Thompson said she understood Treasury's only real remedy would be to threaten to boot the servicer from the program.
Treasury's announcement today focused on one of the central problems for the program: Getting homeowners from trial modifications into permanent modifications. TARP chief Herb Allison testified near the end of October that the number of permanent mods was "less than 10,000." Treasury has yet to announce how many modifications have become permanent, but will start reporting that number next week.
Homeowners tentatively approved for a modification under the program - as we've reported, no easy feat - start with a three-month trial period. That's supposed to be enough time to not only ensure that the homeowner can make those reduced payments, but also that there's enough time for homeowners to send the servicer the required documentation (including verification of income and an affidavit swearing that the homeowner is having difficulty making the mortgage payment). So far, that hasn't been enough time.
Assistant Secretary Barr said today that the "overwhelming majority" of homeowners have been able to make the trial payments. The problem has been the documentation. Treasury officials said that approximately 375,000 of the trial modifications will have gone through the trial period by the end of the year. But it's still unclear what portion of them will get permanent mods. Treasury says less than half of the 375,000 have submitted all the required documentation. Barr put the blame for that on servicers and borrowers alike: The servicers for not processing documentation when they receive it, and borrowers for not being prompt in sending it in.
Since the beginning of the program, there have been ample reports of homeowners' frustrations dealing with the servicers. Many homeowners say they've faxed in the same documents over and over, have gotten conflicting advice, and have generally suffered through a kind of customer service hell.
Treasury said today that it would address those problems by sending "SWAT teams," as Barr described them, of Treasury and Fannie Mae employees to the offices of the biggest servicers. (Fannie Mae is administering the program.) Despite the connotation of black-clad police kicking in doors, three-people "SWAT teams" will simply be charged with assessing how a servicer is processing the documentation and whether it can be improved. Nevertheless, this does appear to be the closest oversight of the servicers that Treasury has exercised in the program so far. (As we've reported, Freddie Mac, tapped as the program's auditor, has not impressed.)
Treasury officials said they would release a report next week that will show how many trial mods each servicer has so far converted to permanent mods. We'll post the results, as we do every month.
Source: http://www.truthout.org/topstories/113009ms4
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