Bloomberg tells us that the Fed and the Treasury made a joint statement today asking mortgage servicers to take a more proactive stance, identify borrowers in danger of gong into default, and offer loan modification. Tanta at Calculated Risk provided a link to the “ Interagency Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages,” and here is what we regard as the operative part:
Servicers of securitized mortgages should review the governing documents for the securitization trusts to determine the full extent of their authority to restructure loans that are delinquent or in default or are in imminent risk of default. The governing documents may allow servicers to proactively contact borrowers at risk of default, assess whether default is reasonably foreseeable, and, if so, apply loss mitigation strategies designed to achieve sustainable mortgage obligations.
Unfortunately, like other Bush Administration measures to address the growing housing crisis, there is less to statement than meets the eye.
The Fed and the banking regulators under the Treasury’s umbrella, such as the Office of the Comptroller of the Currency, have nicely asked mortgage servicers if they can use loan modifications to rescue more borrowers at risk of default. And in the good old fashioned days of banking, when the original lender held the mortgage, “mods” were the preferred way to prevent foreclosure, since in most cases a foreclosure was less attractive than keeping the borrower in place.
However, in our new world of securitized finance, what the servicer can and cannot do is determined by the servicing agreement between the legal entity that holds the mortgage assets on behalf of the various investors and the mortgage servicer. I am told that those agreements are governed by state law. Federal banking regulators have no authority to tell servicers to ignore or waive the terms of these agreements. Hence, all they can do is plead.
Most agreements restrict loan modifications, and our impression is that in many cases that extends to loss mitigation mods (it’s standard to restrict mods that aren’t related to loss mitigation; you don’t want the servicer enabling what is tantamount to refinance to take advantage of falling interest rates, for instance. The servicer would get the same fee as before, but you the investor would get less income). The Bloomberg story notes:
Even if loan-servicing companies want to make changes, their contractual obligations may block them.
Eight of the 31 subprime-mortgage deals that Credit Suisse Group bond analyst Rod Dubitsky looked at for an April report capped the amount of loan modifications that can be done at 5 percent of either the total loan number or their balances.
Banks and borrowers also may be worse off if they delay inevitable foreclosures because slumping home prices may create even lower resale prices, according to Josh Rosner, managing director at the New York investment research firm Graham Fisher & Co.
The last point, that delaying foreclosure may be a bad strategy financially, is important. Servicers would be reluctant to take actions that could easily be argued to have been to the investors’ detriment. So that is a further deterrent to mods in a falling housing price environment.
So the real reason this statement has little significance? Servicers have every incentive to keep borrowers alive. They collect handsome fees. And Tanta reports that from a servicers’ perspective, having a defaulted but not yet foreclosed borrower is an unattractive outcome:
That said, what you want to watch if you’re looking at a servicer is the category of loans that are 90+ days delinquent but not yet REO. That may not be anyone’s largest pile of delinquent loans (out of the total of 30-60-90-120-FC-REO), but it’s the one that is the expense-hole. Anyone who is letting that bucket get bigger at a faster rate than it is racking up 60-day delinquencies has a problem. Every loan that is 90 days down this month was 60 days down last month, so out-of-proportion increases in the 90+ category means that the trouble is on the liquidation (escape) side, not just the credit deterioration (entry) side: BKs or legal-document troubles are delaying foreclosure, or nobody really wants to foreclose right now because the bids are going to suck so badly. Dragging it out, though, just makes the servicer wait that much longer to get paid and eats away at what the investor will recover. It’s expensive to carry REO and market it, but you can’t list it until you own it and you can’t sell it until you list it. There are ways to win at the servicing game, but there are also many ways to lose.
Another sign of the likely lack of practical significance of the regulators’ move: servicers were looking actively, well before this announcement, as to how much they could do in the way of mods. Bloomberg provides examples:
Banks and securities firms, including JPMorgan Chase & Co. and Bear Stearns Cos., say they’ve already begun contacting high- risk borrowers.
“Earlier this year, as we saw all these resets coming, we wanted to make sure people were aware,” Tom Kelly, a spokesman for New York-based JPMorgan, said today. “As the servicer of the loan, our goal is to keep the owner paying the mortgage.”
JPMorgan, which services about $700 billion of mortgages, is presenting borrowers with options including refinancing their loans or simply modifying their interest rate, Kelly said.
Bear Stearns, the second-biggest U.S. underwriter of bonds backed by mortgages, set up a team in April to meet with homeowners having difficulty making payments.
“Wall Street banks don’t want to foreclose on properties, because we’re not in the real-estate business,” Tom Marano, head of Bear Stearns’s mortgage business, said at the time. He said the so-called “Mod Squad” would try to modify borrowers’ loan payments to help them avoid foreclosure.
I hope I am proven wrong. Loan mods are the best solution for borrowers who have the ability to make a reasonable level of payments. But my fear is that the statement by the regulators will not embolden mortgage servicers to do more than they are already doing.
I’m going to have to go back and re-read Tanta’s Servicer UberNerd then, Yves, because from my own personal experience and research, a defaulted and not yet foreclosed borrower is an absolute GOLD MINE for a servicer.
According to virtually every prospectus that I’ve read, servicers get to keep modification fees, forbearance fees, and late payments as ADDITIONAL SERVICING COMPENSATION. That being the case, there is absolutely zero incentive for a servicer to keep a borrower current in their loan. To do so cuts the servicer’s bottom line drastically.
One of the big complaints against Fairbanks Capital n/k/a Select Portfolio Servicing Inc. in USA/Curry v. Fairbanks was that payments made on time were not being posted until after they considered “late” by the servicer. I have proof of this in my own case. A payment that I had made that was received before the expiration of my grace period was held for 11 days between the time it was received (April 12) and the time it was processed (April 23)by Fairbanks. On the stand, under oath, before a judge their legal counsel attempted to get me to agree that the processing date (April 23) was the date that the payment was received. The only problem with that argument was that the check was stamped “received April 12” on the front of it.
Next thing I’ll be hearing is that there is no money for lenders or servicers in foreclosures…
That is very interesting. I’m not at all close to servicing, and the media barely understands the concept, so more information is always helpful.
If what you say is true, it may point to a different pattern in servicer behavior: letting the borrower hang in the breeze a bit but still offering a mod to prevent/forestall foreclosure.
My understanding is that it’s still better for a servicer to keep a loan in the pool rather than have it become REO. If so, they have an incentive to offer mods to the extent they can as the course of higher fees. What’s your view on that? That’s really the key issue here, whether the servicer has an incentive to offer mods.
Sorry it took me so long to find my way back here, Yves.
As far as whether it’s better for a servicer to keep loans in the pool – well, why would a servicer really care other than for every loan that goes belly up that’s one less opportunity to collect “fees” above and beyond their .375% or whatever figure it was that they were collecting as a “servicing fee”.
In many cases, servicers already have incentives to offer mods – depending on how the Pooling and Servicing Agreement for the trust prospectus is written. Depending on the negotiated terms of the PSA, the servicer would get to keep the modification fee as additional servicing compensation as well as late fees, etc. And, quite frankly, the longer a servicer can keep a borrower in the loan, the longer the servicer can bleed the borrower and/or the equity in the home.
Regardless, the various insurance policies that insure the trusts will absorb the costs of any loan found floating face down in the pool. That’s one of the reasons I choke every time I hear the whole “there-is-no-money-in-foreclosures” mantra. To date, I have yet to see ANYONE prove how a foreclosure costs a lender/noteholder upwards of $50,000.00 All of the associated fees are charged back to the borrower where they eat up any equity a borrower may have in the property.
Once either the borrower can no longer squeeze out any more payments or the equity in a property is sufficiently absorbed, it’s time to foreclose the property and auction it off – effectively laundering the property from the lender/noteholder’s books and getting it ready for the next cycle.
And please forgive me, it’s just too late tonight to spell check – which should make for potentially interesting reading. :)