While there is no shortage of mortgage-related talk nowadays – especially in light of the Treasury Department's announcement of the bad-asset purchase program last week – much of the information that's creeping out of Washington is speculative. No answers appear certain yet.
So instead of examining the many questions surrounding the Treasury's heavily debated plan, I'd like to take a look at a less conspicuous occurrence that went down in the Capitol last week.
Led by Rep. Barney Frank, D-Mass., the House Committee on Financial Services reviewed servicers' loan modification efforts. Panels comprised representatives from federal agencies, banking executives and housing market analysts, among others.
Frank opened up the discussion by expressing concern with the discretion fissure that resides in the loan modification process.
"Do the servicers who might be convinced that a certain modification would be in everybody's interest have the power to make it?" he asked. "It's clearly not a good public policy to have important decisions so split in terms of the power to make them that the decisions can't be made."
One of the more revealing panelist testimonies came from Alan M. White, an assistant professor at the Valparaiso University School of Law. A former legal services lawyer in Philadelphia, White has dealt with his share of modification negotiations and foreclosure cases in the past, and it was with those experiences in mind that he decided to begin collecting data pertaining to loan mods.
As part of his study, White researched 4,300 modifications made between July 2007 and June 2008 using a sample of 105,000 mortgages. Data was combed from nine out of the top 15 subprime lenders and eight out of the top 15 servicers, and most of the loans studied were originated in 2005 or 2006. Most loans included were hybrid ARMs.
Two areas of his research provide startling conclusions. First, White found that loss severities on completed foreclosures jumped by about 10% (from 30% to 40%), "meaning that investors are doing worse and worse by choosing the foreclosure option," he noted.
Second, he found an absence of uniformity in terms of workouts chosen. Modifying a loan, it appears, is kind of like eating an Oreo – everyone has a different way of doing it.
"Although the trustee was the same for all the mortgage pools I studied, there was no uniformity in the approach to workouts," White testified. "Some servicers made significant principal and monthly payment reductions, while others offered only reamortizations that increased loan balances."
It's worth noting – despite the up-in-the-air nature of the Treasury's plan – that the Senate Banking Committee recently issued a discussion draft of the distressed-asset purchase program, and a recurring theme found within is the need for modifications to ensure long-term homeownership.
Indeed, the pressure on servicers to provide extensive modifications that satisfy investors' wishes as well as achieve home retention for borrowers does not look to be going away any time soon. Rather, the pressure will only increase. Buckle up.
