Dear readers, I had wanted to go through the geeky American CoreLogic Mortgage Resets study, which gives mind-numbing detail on what type of mortgages reset when to come up with a more refined guesstimate of how many borrowers might be eligible for the formerly-Paulson, now Administration subprime program.
The Administration claims its program could help as many as 1.2 million borrowers, or two-thirds of the subprime cohort. That number sounds like pure PR. Non-profit housing experts put the numbers much lower. The Greenlining Institute pegs the percentage of subprime borrowers who would qualify at only 12% (240,000); the Center for Responsible Lending estimates only 145,000 would benefit.
But further analysis of the numbers will have to wait. I wanted to address one topic now, which is whether the plan could be successfully challenged by unhappy investors. My reading is yes. Why do I think so? Beyond the fact that lawyers are very clever and there are doubtless some flies in the ointment, there is at least one obvious basis for attack. The American Securitization Forum, one of the key members of the so-called New Hope Alliance, has, in endorsing this plan, done a 180 degree turn its recommendations fo industry standards for loan mod procedures, and in a short period of time to boot.
Tanta at Calculated Risk’s initial (and detailed) discussion argued that the plan was awfully convoluted and accomplished comparatively little because it was designed not to run afoul of current agreements (note that there is no “safe harbor” or other legislation proposed by the Administration to shield mortgage servicers, the ones who would be making the loan modifications). But the American Securitization Forum may be hoist on its own petard.
Please note very carefully what I am saying here. I am not predicting whether investors will sue; that depends upon whether they think the plan will have an adverse impact on them, and whether it is big enough to merit the cost of filing a suit. They may have very good legal grounds but may feel it’s not worth the bother.
The other notion to understand clearly is what I mean by “successfully challenge.” I am not predicting that a plaintiff will win in court; 95% of lawsuits are settled and never reach trial. But one can prevail either by stopping or limiting behavior one doesn’t like, or by achieving a reasonable negotiated settlement.
How do those things happen? In all candor, it does not depend entirely on the merits of one’s case. It depends on being able to mount an argument that is strong enough to survive a motion for summary judgment (that is a merits of the case issue). Then the outcome can be significantly influenced by how costly, unpleasant, and embarrassing one can make the discovery process. Success in litigation often depends on the pain one can inflict on one’s opponents. For example, if you have legitimate reasons to depose senior executives of your opponent’s important clients, and the line of questioning would make them uncomfortable or better yet, damage the relationship with your opponent, that alone might lead to settlement negotiations.
A quick reading of the documents at the American Securitization website on the subprime plan suggest some clear avenues for a suit. And I am sure clever attorneys who had access to the servicing agreements could come up with much better and more specific ideas. Any lawyers or investors who have litigation experience are particularly encouraged to weigh in.
The plan goes to some effort to camouflage the elephant in the room, namely, the American Securitization Forum’s repudiation of its former position. Let’s first review the basic parameters. Michael Shedock has posted the key terms at his site, which is a bit faster than registering for free at American Banker). I’ve simplified this a bit but it’s pretty faithful:
Borrowers who are deemed to be “eligible to refinance into other products,” aka Segment 1, are out for the most part, although the servicers can include them on a case-by-case basis. Having a FICO of over 660 or a LTV or CLTV better than 97% puts you in this group. Borrowers also must be current, which means presently not more than 30 days past due and at most over 60 days past due only once in the last 12 months (under the Mortgage Bankers Association definition, not more than 90 days past due more than once). The homeowner must not be eligible for FHA Fast Secure and must occupy the house (determination based on borrower’s representation).
Segment 2, the so-called “fast track,” will have FICOs of less than 660, LTV higher than 97% . Borrowers whose FICOs have improved 10% fail the FICO test (as do ones whose FICOs are greater than 660) but can be evaluated on a case-by-case basis.
Segment 3 are the bottom tier, not eligible for fast track, but still may be able to get a conventional mod (in theory, of course).
Now to the fun part. In June 2007, the American Securitization Forum, which was depicted in the press as a representative of investors in the New Hope Alliance (in fact, its members include issuers, rating agencies, financial intermediaries, guarantors, law firms, accounting firms, so it would hardly seem able to represent any one group) published a “Statement of Principles, Recommendations and Guidelines for the Modification of Securitized Subprime Residential Mortgage Loans” (starts on page 18 of this pdf, boldface mine).
The overall purpose of this Statement is to provide guidance for servicers modifying subprime residential mortgage loans that are included in a securitization….
Loan modifications should be considered and made on a loan-by-loan basis, taking into account the unique combination of circumstances for each loan and borrower, including the borrower’s current ability to pay. The ASF is opposed to any across-the-board approach to loan modifications, and to any approach that would have all modifications structured in a particular manner. The ASF is also opposed to any proposals that would provide an across-the-board moratorium or delay period on foreclosures.
Generally, the ASF believes that loan modifications should only be made….
f. Where there is a reasonable basis for the servicer concluding that the borrower will be able to make the scheduled payments as modified; and
g. In a manner that is designed to provide sustainable and long-term solutions, but does not reduce the required payments beyond the magnitude required to return the loan to performing status, or beyond the anticipated period of borrower need…..
In evaluating whether a proposed loan modification will maximize recoveries to the investors, the servicer should compare the anticipated recovery under the loan modification to the anticipated recovery through foreclosure on a net present value basis. Whichever action is determined by the servicer to maximize recovery should be deemed to be in the best interests of the investors.
Now a lawyer is going to have a field day with this. It’s a given that considerable thought and effort went into this document. Yet a mere six months later, the same organization, due to pressure from the Administration, repudiates some of the key precepts it outlined. In particular, the June document argued for a case by case approach, no “one size fits all” mods, that any mods were (in essence) to get as much from the borrower as was feasible, any reduction was to be limited to the period of borrower need, and the servicer was to compare the attractiveness of the deal versus the recovery in a foreclosure (remember, these borrowers won’t default overnight. It might take a year or two and in some locations, the real estate market might have rebounded) . All these steps, recommended as proper practice, have now been thrown to the wayside.
The critical point is without taking these steps, there is no way of being certain a mod is the best outcome for the investor. That’s precisely why these measures were in place. I would assume that there is an argument to be made that this program is strictly for servicer convenience (yes, mods are often the best answer, but the servicers should staff up, do it right, and eat the costs, and not maintain their profit margins at investor expense).
The December American Securitization document “Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans”, predictably, tries to finesse its earlier position:
As to Segment 2 loans eligible for a fast track loan modification, the servicer may make the following presumptions:
o The borrower is able to pay under the loan modification based on his or her current payment history prior to the reset date.
o The borrower is willing to pay under the loan modification, as evidenced by a) an agreement to the modification after being contacted or b) in the event that the affirmative agreement of the borrower cannot be obtained, the borrower’s
payment of two payments under the loan as modified after receiving notice of the modified terms.o The borrower is unable to pay (and default is reasonably foreseeable) after the upcoming reset under the original loan terms, based on the size of the payment increase that would otherwise apply.
o The modification maximizes the net present value of recoveries to the securitization trust and is in the best interests of investors in the aggregate, because refinancing opportunities are likely not available and the borrower is able and willing to pay under the modified terms.
“May make the following presumptions” is an awfully strong assertion for a document that does not have the force of law. The narrative might even sound reasonable until you compare it with industry practice (and as Tanta has pointed out repeatedly, industry practice ain’t what it used to be).
In case you were wondering, the second dot point deals with the scenario in which the servicer is unable to contact the borrower but decides to offer the mod.
Note dot point thred. The borrower is presumed to be unable to pay. The outlines (both American Banker and American Securitization Forum) look to ONLY the size of the reset, the FICO, the LTV, and the payment history to make that determination. Payment history and FICO alone can probably be successfully attacked as an inadequate basis for making a determination (expect duelling experts here).
Similarly, dot point four, the mod is “presumed” to be the best solution; no reference to foreclosure, either currently (remember, these people are not in default, or even delinquency, so if and when they will default is subject to debate) or prospectively. This is the equivalent of a big wave of a magic wand in place of analysis.
Here is the section that specifically tries to get around the earlier statement (boldface mine):
The June 2007 Statement provides further interpretive guidance that in evaluating a loan modification, the servicer should compare the anticipated recovery under the loan modification with the anticipated recovery through foreclosure on a net present value basis, that whichever action maximizes recovery should be deemed in the best interests of investors, and also that the standard “in the best interests of” the investors should be interpreted by reference to the investors in that securitization in the aggregate.
For any securitized pool and set of fast track loan modifications, as to each loan in the group, the servicer will have determined individually that the borrower is not able to refinance, that the borrower is able to pay at the current rate, and that there is a reasonable basis for believing that the borrower will not be able to make payments under the loan as originally required after the upcoming reset date.
In light of current market conditions including home value trends, it appears that key elements of any net present value determination (such as default rates with or without a modification, and loss severities) cannot be accurately predicted based on historic data. Nevertheless, we believe that a servicer can appropriately take the view that a group of loans modified under the fast track procedures for Segment 2 loans will in the aggregate result in a better recovery on a net present value basis, when comparing the reduction in interest payments that may result from the modifications with potential losses upon foreclosure that might have resulted absent the modifications. Accordingly, we believe that the methodology for making fast track loan modifications under Segment 2 complies with this guidance, and will result in action that is in the best interests of investors.
For the first bold section, the claim that the servicer “determined individually” based on crude and unreliable data is a stretch and subject to attack.
The second bold section is not only questionable but could be used to inflict pain on the people in New Hope Alliance involved in the negotiations. It’s an open invitation for an attorney to depose the people involved in the development of the plan and ascertain to what degree, if any, they did financial analysis (and remember, senior people hate being deposed). Given how quickly this plan was put together, and the language used, it’s a near certainty that they didn’t. Therefore, they are making assertions as to outcomes with no factual underpinning. The lawyers will be able to extract, in fact, that outcomes aren’t completely indeterminate (which is what that language asserts), that one could develop floors and ceilings nationally, and by local market, of what outcomes might be (houses are not going to double in price nor are they going to zero, and the estimates can be bounded more tightly than that. I suspect most people involved would agree that 20% below current recovery levels is probably a floor in most markets.)
So then the interrogation will continue: the New Hope Alliance could have set some default parameters and done a little financial modeling and added some screens related to recovery. And the attorneys will have great fun waving sheaves of output from the very detailed databases on loan resets and pointing out that the coalition spent a lot of time on this part of the equation, why not on the other? Believe me, it will be very easy to show these guys punted on this question. I am fairly confident that given Paulson’s eagerness to announce a plan in a week, they did not do the CYA measures to forestall this line of attack.
I have seen some statements that said the services would rely on borrower representations as to income. This opens up another line of legal challenge. Why no verification? Borrowers have an incentive to understate income so as not to be deemed to be too well off and be subject to a reset. The experience with no-doc loans has demonstrated beyond doubt that borrowers (many of these very same borrowers) lied. We’ve seen estimates that 40% to 60% of the no-doc borrowers misrepresented their income to a significant degree; the subprime plan is in effect no doc refis.
So we have another line of attack: borrower representations, particularly in this segment of the market, have been shown beyond a doubt to be rife with fraud, Imagine the attorneys making the various originators and servicers go over their reports to the FBI. It’s undeniable that the members of the New Hope Alliance were well aware of this problem. Yet they are recommending the use of the same certain-to-be-rife-with-fraud process to force payment reductions on to investors. It’s one thing when they started this no-doc mess; no one anticipated how much fraud would result (I personally don’t buy that, but it is a defensible argument). Now they know better. How can they justify enabling fraud. particularly at the further expense of investors, when their own guidelines call for them to combat it?
Now having said that, there are some interesting wrinkles in the mod plan:
For borrowers that are eligible for a fast track modification, the fast track option is non-exclusive and does not preclude a servicer from using an alternate analysis to determine if a borrower is eligible for a loan modification, as well as the terms of the modification.
This raises the possibility that the servicers might not offer “one size fits all” mods after all. As the Financial Times said:
Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said in response to questions about the use of credit scores as a screening device that the plan would be undergoing “further refinements”.
It will be interesting to see whether that turns out to mean they will flesh out the many yet unclear procedural details, or will wind up beating a retreat on some of the initial parameters.
26 comments
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Yves, please don’t forget to focus on the qualifications for the reset and the parties in the “newhope” team.
Requirements
1) Mortgage had to be issued between January 2005 and July 2007 – Not shocking.. this is also the time derivatives origination ramped the quickest.
2) Home must be worth more than the mortgage – Given that most loans during this period were 100% financed, how exactly is this possible? More fraudulent comps?
3) You must not have more than 3% equity in your home – You’re solvent? How dare you, sir!
Look at the members of the hopenow team – why are CFC, Wachovia, WaMu, Citi all excluded? And, look at the other names — Ocwen and Wilshire. They are the 2 biggest companies in the US who make money from foreclosure.
This has nothing to do with keeping people in homes. However, it will enable banks to stay solvent for however much longer that 75k additional loans performing for one year can help capital requirements.
What’s the difference between tortious interference and tortuous interference? Over the next 18 months, I suspect quite a lot of both. Great post, BTW.
The biggest ground for investor lawsuits will be fraud as IBs at the very least were reckless in marketing and packaging toxic waste as secure investment products suitable for pensions, municipalities and money market funds. It’s the equivalent of lead paint on toys; the defect (unqualified borrowers) is undetectable to the purchaser until a toxicity test. These structured products failed the reset test and the IBs knew that would happen but sold the product as safe and reliable.
With the dot com fraud, the timing scandal and the hedge fund meltdowns (Goldman and Bear) it won’t take much to convince anyone that this is just another in a long line of IB fraud schemes.
Fun times for lawyers.
I think one of the reasons that they don’t want to have to force borrowers to verify their income is that if they had to, they wouldn’t. For a borrower that “fudged a little” it would be tantamount to self incrimination. I also have a feeling that the magnitude of the “fudge” would also be so large that it would implicate the lenders of willful negligence.
I almost wonder if the lenders speculated that this housing bubble was going to be like the 70’s where wage inflation followed asset inflation. I.E. that real incomes would eventually rise to match the stated ones. It would appear that similar thinking is behind this plan.
Hope team is a nightmare of collusive lenders that have suspect expertise…
http://www.995hope.org/who-we-are/board-of-directors/
Bruce Paradis
Former CEO, Residential Capital LLC
Bruce Paradis served as the CEO of Residential Capital LLC (ResCap) until his retirement in June 2007. Prior to the formation of ResCap in May 2005, Paradis served as President and CEO of GMAC-RFC (now ResCap) from 1994 to 2005. He joined GMAC-RFC in 1983 as Vice President of Marketing and held several leadership positions within the GMAC-RFC family. Paradis will continue his work with several non-profit organizations, including HPF.
Sandor E. Samuels
Executive Managing Director, Chief Legal Officer and Assistant Secretary Countrywide Financial Corporation
Sandor E. Samuels is Executive Managing Director, Chief Legal Officer and Assistant Secretary for Countrywide Financial Corporation. He serves on Countrywide’s Executive Committee and directs the Company’s public affairs activities. Samuels joined Countrywide in 1990 after a successful legal career in private and corporate practice, including senior positions with First Interstate Bancorp, FIMSA, and Fox, Inc. Samuels serves as the Chairman of Bet Tzedek Legal Services and is the Chairman of the Advisory Board of the Ziegler School of Rabbinic Studies. He also serves as a member of the Board of Directors of the University of Judaism, Bet Tzedek, the Los Angeles Urban League and Adat Ari El synagogue. He also has served as Chair of the Legal Issues Committee of the Mortgage Bankers Association of America. Samuels has been honored with the Founders Award by Bet Tzedek and was named Outstanding Corporate Counsel of the Year in 2005 by the Los Angeles County Bar Association.
Re: You must not have more than 3% equity in your home – You’re solvent? How dare you, sir!
Must not have more than 3% equity in your home, which I guess implies that for every $100,000 you would have $3000 in equity
Re: Mortgage had to be issued between January 2005 and July 2007
So, within 2 years, a person would have to have put $6000 into equity on $100,000, which is 24 payments resulting in $250.00 per month.
That to me is not possible given the interest rate being paid out, i.e, I would be SHOCKED if these subprime borrowers across the scale had more than $30.00 per month go to equity!
Do we have an expert in here to help with this??
Revealing more details about a national mortgage-rescue plan that’s still in the works, Treasury Secretary Henry Paulson proposed Monday to help state and local governments issue tax-exempt bonds to pay for mortgage refinancing and confirmed that he seeks to temporarily freeze the rates of tens of thousands of home loans that are about to adjust to higher rates.
Paulson told a national housing forum that Congress should authorize state and local governments to broaden their tax-exempt bond programs temporarily. Currently, states have authorization to issue tax-exempt bonds only to aid first-time homebuyers in designated distress zones. Paulson proposed to expand this to allow state and local governments to issue tax-free bonds to help in mortgage refinancing.
Dec 5 (Reuters) – The U.S. Treasury Department said Wednesday that it supported temporarily lifting the cap on the volume of tax-exempt bonds that state and local governments may use to buy troubled home loans.
“The Secretary’s proposal would increase the volume cap by a total amount to be determined in consultation with Congress and the states. It would be for use in the three years from 2008 to 2010 for refinancing with qualified mortgage bonds,” Treasury spokeswoman Jennifer Zuccarelli told Reuters.
In a speech addressing problems in the housing market on Monday, Treasury Secretary Henry Paulson said state and local governments should be permitted to issue tax-exempt bonds to fund refinance programs for struggling subprime homeowners. He did not provide many details.
The proposal to allow tax-exempt bonds to refinance troubled mortgages is just one part of a Treasury-brokered plan to help troubled borrowers to be unveiled on Thursday.
About 12 states have already launched or are in the process of launching mortgage refinancing programs but they have been financed through taxable bonds or other sources.
State and local agencies sold $30.5 billion in housing bonds in 2006, according to Thomson Financial, but only $6.4 billion were tax-exempt.
http://www.govtrack.us/congress/record.xpd?id=110-h20071115-21&bill=hr110-825#sMonofilemx003Ammx002Fmmx002Fmmx002Fmhomemx002Fmgovtrackmx002Fmdatamx002Fmusmx002Fm110mx002Fmcrmx002Fmh20071115-21.xmlElementm24m0m0m
Mr. Speaker, I will address much of the substance of the bill in the general debate. I do want to say we are here dealing with an issue, subprime mortgages, that is the single biggest contributor to the greatest financial crisis the world has seen since the Asian crisis of the late nineties.
We are in a very difficult situation now in the financial markets; and wholly unregulated subprime mortgages, unregulated by the originator and then unregulated in the secondary market, has given rise to this.
The previous speaker talked about the danger we could do with our liability for the securitizers. I would note that one of those who volunteered to our committee that we should do something, he wasn’t specific about what, but something to put some liability there was the Chairman of the Federal Reserve, Mr. Bernanke, who has talked about what he called the originate-to-distribute model, i.e., people who give mortgages who are not themselves subject to regulation who then in turn sell into a secondary market, and what has been lost in that is the responsibility to worry about repayment. Now, we will talk more about this.
There is a delicate balance here. I am not in favor and this bill does not in general preempt the rights of States to do what they think is necessary in the consumer protection area. But in the matter I just talked about, when we are talking about a national secondary market, we did believe some preemption is necessary. We have tried to define it precisely and hold it to a minimum necessary to have a functioning market. As I said, I will address some of those more.
The bill, I believe, does strike a balance that can be a difficult one to achieve, particularly in that area of some preemption so that you have a functioning secondary market, but not to the point where you intrude on the rights of States to make these decisions.
I do want to address the rule. At my request this rule does make in order a number of amendments from both parties. Several of the amendments offered by Republicans will be, I hope, accepted. The manager’s amendment itself is a genuinely bipartisan amendment. Much of the manager’s amendment, in fact, came from the minority; and, indeed, in our committee the ranking member had a major input into this. This bill did pass committee by a vote of 45-19, which was the Democrats and, not a majority, but a significant number of Republicans.
We have, I believe, a rule that allows most of the issues that are at stake to be voted on. There are amendments that would strike major parts of the bill. The gentleman from North Carolina has one. The gentleman from Georgia has one. There is a third, the gentleman from New Jersey. Three amendments that would strike very much at the heart of the bill. I believe they should be debated and I would hope defeated, but they are made in order.
I did consult very much with the ranking member, and I believe we have a procedure today that doesn’t cover everything, but will have the major issues before us.
At the end of today, I hope we will have passed a bill and it will be a bill which I must say will probably leave all parties at interest a little bit unhappy. I’m not pleased with that, but I think given the competing interests here, that is the best we can do, particularly on this issue of whether or not we preempt.
I would note that while some of the groups that I work with in the consumer area are disappointed because they wanted no preemption at all, passage of this bill is supported by the Conference of State Bank Supervisors. They think there are some things they would like to see changed further on. It’s supported by the NAACP and La Raza. And it has, we believe, the essential elements.
The core is this: loans made by banks as originators subject to bank regulation have not been the problem. The problem has come when loans were originated by unregulated people, not that they were morally deficient, but there was no regulation. Here is the core of this bill: we have tried talking to the bank regulators and others to take the principles that the bank regulators have applied to loans originated by regulated depository institutions and apply them to the unregulated originators, the brokers. And it is not the case that the brokers were morally deficient. In all of these professions, we have an overwhelming majority of honest people. But the problem is, in the absence of any regulation and the availability of a secondary market with no rules, that minority that was not scrupulous caused us problems. This bill fixes that.
The American Securitization Forum wrote the rate freeze presented to the public by the President and the Treasury Secretary.
I found it on americansecuritization.com.
The framework allows servicers to modify loans without borrower signatures
Source: American Securitization Forum, Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, Executive Summary, December 6, 2007, page 13, third paragraph from bottom of page
Some of the firms involved in the bailout are members of the industry group that authored the plan, including Countrywide Home Loans, Ameriquest Mortgage Company, Capital One, Citi Global Markets Inc., Fannie Mae, Freddie Mac, GMAC, JPMorgan Chase, Thornburg Mortgage, Inc., Washington Mutual Bank, MetLife
DBRS, Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s
ABN AMRO, Inc., Banc of America Securities LLC, Barclays Capital Inc., Bear, Stearns & Co. Inc., Countrywide Securities, Credit Suisse, Deutsche Bank Securities Inc., Goldman, Sachs & Co., HSBC Securities (USA) Inc., Lehman Brothers Inc., Merrill Lynch & Co., Morgan Stanley, UBS Investment Bank, PIMCO etc…
Gosh, I wonder if this bank bailout will be qualified, as Paulson re-writes any law in the way?
http://www.ncsha.org/section.cfm/3/34/36
Sec. 143. – Mortgage revenue bonds: qualified mortgage bond and qualified
veterans’ mortgage bond(II) no portion of the proceeds of the issue are used to make
or finance any loan (other than a loan which is a
nonpurpose investment within the meaning of section
148(f)(6)(A)) after the close of such period.
(i) Other requirements
(1) Mortgages must be new mortgages
(A) In general
An issue meets the requirements of this subsection only if no part of
the proceeds of such issue is used to acquire or replace existing
mortgages.
Anon of 3:45 PM,
I’ve seen that proposal, and haven’t commented on it. I think it’s part of the general Administration “blame others for not taking action” strategy (Paulson earlier in the week made a speech blaming Congress for inaction).
First, with Ambac, and MBIA at risk of downgrade, they have stopped insuring municipal bonds. That means it’s hard and particularly costly for municipalities to raise funding right now. And that’s independent of the issue that their budgets are already under stress due to falling tax receipts. The last thing they need is another large financial commitment right now.
Second, as we’ve discussed, quite a few states have funded borrower rescue programs in place; they haven’t been terribly effective. Persisting in a failed strategy is not a sign of intelligence.
Anon of 4:25 PM,
That document is referenced in the post, as is the mechanism for modifying the loan without investor consent. It’s called “deemed acceptance.” It’s the second dot point in one of the indented sections:
o The borrower is willing to pay under the loan modification, as evidenced by a) an agreement to the modification after being contacted or b) in the event that the affirmative agreement of the borrower cannot be obtained, the borrower’s payment of two payments under the loan as modified after receiving notice of the modified terms.
As for the membership of the American Securitization Forum, yes, it includes a lot of the perps, but it does include investors. Otherwise I would have made more hay out of that point.
Yves,
It’s much simpler: what AFS did was redefine `standard industry procedure’ for mortgage servicers, thereby rewriting thousands of private contracts where that phrase appears in one fell swoop. AFS doesn’t speak for MBS investors; it speaks for industry players who earn fees on securitized transactions (underwriters, servicers, etc.) There will be litigation, if an investor can show a loss that makes going to court worthwhile. But that’s not the problem. What the plan has done is inject a new uncertainty into mortgage financing and regardless of whether a suit is filed, the result will be even tighter mortgage credit. The new uncertainty is that the government will interfere again in private contracts if the housing market deteriorates further. So the problem with the Paulson plan is not the litigation that may result, but the more general risk of political interference in private contracts.
Bugs Bunny and Elmer Fud are alive and well in hio:
http://www.ohiohome.org/newsreleases/rlsrefinanceprogram.htm
To assist families with closing costs, the refinance program also offers a 20-year, fixed-rate second mortgage option at an amount up to four percent of the appraised value of the home. The second mortgage may be used for other similar financing charges such as payoff of the first mortgage, including late fees or attorney fees. Interest rates on this option will be two percent above the rate of the first mortgage.
Initially, the refinance program will be made possible by the issuance of taxable bonds. OHFA’s initial taxable bond issue will enable the Agency to serve approximately 1,000 families with the program presuming an average loan amount of $100,000 per home. This is just an approximation. If demand is sufficient, the Agency will issue additional bonds or other forms of financing. OHFA hopes that up to $500 million each year could be provided if the demand exists. Funding obtained from these sources will allow OHFA to not only offer refinancing options, but also to fund additional homeownership programs in the future to meet the housing needs of Ohioans.
Steve,
I agree completely with your point about uncertainty in mortgage finance, and the cure being worse than the disease. I don’t see how anyone with an operating brain cell would buy ABS backed by any type of consumer debt after this intervention.
As to your opening point, the ASF is not a regulatory body; it’s a lobbying organization first and foremost. Thus while it may be attempting to rewrite “industry standard procedure,” what procedure is a matter of fact, not assertions. I’m not an attorney, but I believe this could be challenged, particularly given the June document’s vocal opposition to anything other than case-by-case mods.
And remember, servicer margins aren’t that large. A few suits by well funded investors (meaning they’d clearly go the distance and would not be deterred by the cost of the exercise) would have a chilling effect on the implementation of this plan.
http://www.ohiohome.org/myohio/default.htm
My Ohio Mortgage is a Fannie Mae conventional loan product that offers special features to help homebuyers purchase a home.
My Ohio Mortgage helps OHFA lenders serve Ohio’s increasingly diverse population of low- and moderate-income borrowers and communities with a low down payment and flexible terms. Most My Ohio Mortgage loans can be underwritten through Fannie Mae’s Desktop Underwriter® to take advantage of the speed, power and efficiency of automated underwriting.
The program offers:
Minimum borrower contribution
LTVs up to 100 percent
Flexibility on credit histories and nontraditional credit accepted
Section 8 homeownership vouchers accepted as income
Community Solutions™ option with additional flexibility for teachers, police officers, firefighters and health care workers
Homebuyers must meet federal income guidelines and home sales price restrictions. Maximum sales prices vary according to whether a home is new or existing, or if it is in a target or nontarget area.
OHFA is pleased to add this conventional loan product to its growing portfolio of products and services designed to help all Ohioans obtain quality housing.
Good stuff there for The Bush Ownership Society; go baby go!
Yves,
Sorry if I wasn’t clear about things–I agree that changing s.o.p. by fiat can be readily challenged in court. I was just pointing to the mechanism employed by ASF. The real obstacle with the Paulson plan is FAS 140, which basically requires servicers to be automatons without discretion. The only discretion for mods recognized by 140 is when a loan actually goes delinquent–nothing proactive, no crystal ball stuff about debtors going delinquent in the future. If a trust violates FAS 140, the sale is unwound and basically the equity holder has to purchase the pool. Frankly, no servicer is going to risk the lawsuits stemming from that. So the billion dollar question is whether FASB is going to climb aboard the Hope Now tin trolley and `clarify’ FAS 140 in a way that allows prospective loan mods. If the FASB doesn’t act, very few securitized loans will wound up being frozen.
Steve,
Aha, sorry for misconstruing your point. And yes, I hadn’t realized that the ASF was attempting to tie its program into commonly-used contract terms.
The point re FAS 140 is very important, and thanks for passing it along. Amazed I haven’t seen it anywhere (admittedly, am behind the eight ball and haven’t read Calculated Risk yet today. The problem with early AM posting is you get the big news early and the nuance late).
Will check around and if that aspect hasn’t been picked up anywhere that has a good sized audience, I’ll write it up.
I believe Tanta already covered the SFAS 140 issue in detail in her initial reaction. That issue has apparently been taken care of via an official opinion issued by the SEC.
Yves,
The SEC `clarified’ its understanding of FAS 140 in congressional testimony last July, opining that a servicer may act when `default is reasonably certain’ without violating 140. BUT…the SEC’s view (at that time, who knows about tomorrow) clearly envisioned an individual review of a single loan: “Participants indicated that default is reasonably uncertain when there has been contact with the borrower, an assessment of the borrower’s ability to pay has been made, and there is a reasonable basis to conclude that the borrower will be unable to continue to make its mortgage payments in the foreseeable future.” Now the `participants’ mentioned were attendees at a FASB-sponsored conference: “investors, preparers, auditors, servicers, and banking regulators.” So we’re right back to the issue of customary practices for servicers–and it’s pretty clear that only case-by-case determinations were considered by the participants, and that substantial legal uncertainty remains about whether the mass modifications `guidance’ in the Paulson plan will or won’t violate FAS 140.
(I apologize for not having a link to the testimony–this was SEC Chairman Cox’s appearance before Barney Frank’s committee on July 24, 2007.)
Sorry for typo: that’s “Participants indicated that default is reasonably _certain_”, not “uncertain”.
In general, Tanta’s take on it seems to be that it was very carefully designed not to tear up existing contracts (and partly as a result, will not have much of an impact).
However, according to a self-proclaimed mortgage insider in California who paints a dire picture, “The bailout we are hearing about for sub-prime borrowers will be the first of many”. If so, perhaps it is these future bailouts (in the heat of an election year, mind you) that will tear up the rulebook and consequences be damned. Never underestimate what politicians are capable of, for better or (mostly) worse.
Eight states including Massachusetts have pledged almost $900 million this year to help borrowers replace unaffordable mortgages, but the states collectively have refinanced fewer than 100 people, a Globe survey found.
more stories like this
Catastrophe fund backed to insure coastal homes
Patricks signs law to curb home foreclosures
Quiet times on Beacon Hill
Legislature passes foreclosure-aid bill
Massachusetts governor proposes $1.1 billion affordable housing bond bill
In Massachusetts, where the Patrick administration introduced a $250 million program in July as a “big piece” of its efforts to limit foreclosures, not a single loan has been refinanced.
In Maryland, the first state to create a refinancing program, officials have found it so ineffective that they are considering shutting it down. The program has made just nine loans in about a year.
A leading advocacy group said the programs simply aren’t able to help most borrowers. “They’re very well intentioned,” said David Berenbaum of the National Community Reinvestment Coalition, “but these new products aren’t fitting the needs of the consumers we see.”
The vast majority of the applicants aren’t eligible for refinancing. They have either fallen too far behind on their payments, have badly damaged credit, or simply owe more on their loans than the value of their homes, making refinancing effectively impossible.
http://www.boston.com/business/personalfinance/articles/2007/11/21/refinancing_programs_omit_many_borrowers/
Anon of 8:02 PM,
Your second point well taken, although I’d much rather see bona fide bailouts (government programs with specific benefits and costs attached) than these efforts with uncertain costs and benefits (and collateral damage, per a comment above, of increasing uncertainty in the mortgage market) that also socialize the losses. Nouriel Roubini, before he changed his position and started advocating rate cuts, said fiscal measures would be necessary to combat the hard landing he predicted. Some sort of homeowner relief could be one element (again, this raises huge issues of equity, but I think an explicit bailout is easier to target to certain audiences than the plan just put forward).
However, on your first point, I am raising a different issue than Tanta (and I did see and referenced her initial comments).
Irrespective of how carefully the New Hope Alliance crafted this plan to avoid obvious abrogation of existing contracts (and therefore a need for safe harbor legislation, which would have been hugely controversial and still may not have survived Constitutional challenges, since contracts are governed by state law), I am saying that investors could probably launch successful suits if they wanted to.
If I as a non attorney (but having some experience with litigation strategy) can see obvious grounds for a suit, attorneys who have access to the documents and know the ins and out can clearly mount effective challenges. As I indicated, all you need to do is get past summary judgment; once you do that, you can use discovery to get into your opponents’ underwear, which is generally unpleasant and costly.
This concept was thrown together in about a week, effectively less than that when you back out time for drafting the President’s and Paulson’s speeches. You couldn’t get a top drawer law firm to do a legal review of the implications and write an opinion letter in that time.
Anon of 8:32 PM,
I have an earlier post on the fact that various state homeowner rescue plans haven’t produced much in the way of tangible results and put a link to it in earlier comments, but thanks for providing text of similar findings
Great post.
-K
Here’s why some mortgages are beyond hope of any bailout whatsoever, and why the lawyers will be very busy:
“Barely three weeks after moving into the house, the couple decided to abandon it and left without making any payments.”
From a WSJ-affiliated publication… read the whole thing.
Re:
In light of current market conditions including home value trends, it appears that key elements of any net present value determination (such as default rates with or without a modification, and loss severities) cannot be accurately predicted based on historic data
>>Key elements in this context will be valuing the property and thereby using comps, which will be outdated in net present determinations, as the comps have all crashed in a spiral — if you can find a current sale within the last year! The latest comp within a one mile radius may be VERY hard to find for this Key Element of a refi/bailout!