BLOG VIEW: A Foreclosure Plan IOU

After weeks of anticipation, Treasury Secretary Tim Geithner's new Financial Stability Plan mostly failed to live up to expectations, due in large part to the lack of actual detail included.

Although the cost of the plan is nearly unfathomable, I agree with its general direction. Nonetheless, I consider myself disappointed (and, judging by reactions from the stock markets, banking officials and national media, I'm not alone).

I had high hopes that promises of a comprehensive program would be realized with thorough attention to detail, especially as it relates to the crippling foreclosure situation.

Instead, we got this: ‘The president has asked his economic team to come together with a comprehensive plan to address the housing crisis. We will announce the details of this plan in the next few weeks,’ the Treasury's new main man said. Geithner essentially gave troubled homeowners an IOU, not a solution.

Barney Frank, for one, questioned both the amount of the homeowner aid ($50 billion) as well as the timetable laid out by the Treasury. ‘[T]he secretary said the administration would present details of their foreclosure reduction plan in a few weeks, which is too much time. In the meantime, and while we wait for President Obama's plan, I call on institutions that hold or service mortgages to delay and stop any foreclosure proceedings.’

Frank's wish has been answered already by at least one regulator: the Office of Thrift Supervision (OTS). Yesterday, the OTS, which oversees more than 800 thrifts, urged its institutions to stop foreclosure proceedings until President Obama's team unveils its plan for tackling foreclosures. A colleague of mine summed it up nicely: ‘This changes the whole ballgame.’

Can we expect to see similar announcements from the Federal Deposit Insurance Corp. and the National Credit Union Administration coming soon? And how, precisely, is this news being received by mortgage servicers? What is it going to do to their operations?

Servicing Management
delved into the moratoria discussion in a recent issue, and the general sentiment of sources we spoke with was that moratoria alone will not solve anything. A foreclosure moratorium may provide breathing room, but it won't guarantee that bad loans turn good.

But with the OTS pressing thrifts to halt foreclosures, the solution offered by Obama's economic team had better be strong and, yes, detailed. If the foreclosure mitigation plan announced even remotely resembles the superficiality of Geithner's announcement Tuesday, the consequences for thrifts' servicing units will be dire.

In an effort to not derail too much from this blog's initial focus – the Financial Stability Plan – allow me to draw attention to one of the items outlined in a fact sheet provided by the Treasury following Geithner's speech: ‘Help Bring Order and Consistency to the various efforts to address the foreclosure crisis by establishing loan modification guidelines and standards for government and private programs.’

Although commensurate with the general lack of detail found in the new plan's outline, this proposal to bring uniformity to a tremendously non-uniform process (i.e., loan modifications) is an important consideration. Servicing operations are constrained in many ways, not the least of which is too little guidance on how to modify loans.

In a conference call to its members last week, the Mortgage Bankers Association (MBA) laid out its advocacy agenda for 2009.

According to Steve O'Connor, the group's senior vice president of government affairs, the MBA backs implementation of a ‘broad, single comprehensive loss mitigation plan’ that would combine the best elements of previously announced programs, such as the FHA's Hope for Homeowners and the FDIC's Mod-In-A-Box.

Certain standards, like a target debt-to-income ratio of 31% for modified loans, are fairly well adopted. However, there's still much ambiguity that, for servicers, presents little more than lawsuit landmines.

Let me open this up to servicers: What standards and guidelines do you want to see formalized so you can safely and confidently avoid preventable foreclosures?

– John Clapp, Servicing Management


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