BLOG VIEW: No To Cramdowns, But Yes To Safe Harbor

U.S. Senate has denied Sen. Richard Durbin's most recent attempt to[/b] empower bankruptcy judges to modify loans, giving the mortgage banking industry a victory – a rarity nowadays. Meanwhile, the federal foreclosure prevention plan, which the Obama administration envisioned would include bankruptcy cramdowns, has grown in other ways. New incentives encourage servicers and investors to either modify or extinguish second liens, and the government is once again looking to the FHA's Hope for Homeowners (H4H) program as a problem solver for negative equity. Both of these significant developments happened within days of the new administration hitting its 100-day mark. Although I think too much is made of the 100-day barometer, I can't help but reflect on the direction President Obama has taken with the mortgage industry. With Republicans and most Democrats in the Senate voting against the cramdown amendment, Obama was dealt his first big blow, and I'm curious to see how his team reacts. The early-stage evolution of Making Home Affordable (MHA) makes me think the administration will roll with the punches and adapt. MHA, while successful in providing servicers with specific modification guidance, suffered criticism for a variety of reasons (e.g., insufficiently addressing seconds, having too narrow a scope, fueling false hope). In turn, the administration – true to the words of Treasury Secretary Tim Geithner, who intimated months back that the government's multiple economic recovery initiatives would stumble in places and need to be malleable – changed the program's framework. "[The administration] seems to be flexible to evaluating how the program works and making changes to make sure we have as many modifications as possible," Deborah Goldstein, the Center for Responsible Lending's executive vice president, tells SM. "The indicators are that it's flexible, and the critical question is, are those changes good for borrowers?" Whether or not the expanded version of MHA will make a meaningful difference remains to be seen, it is encouraging to see the government making adjustments to its flagship loss mit plan that are in line with industry recommendations. The elimination of cramdown talks (for now) and expansion of MHA are not the only significant changes that have occurred recently. The Helping Families Save Their Homes Act – which makes H4H less expensive and easier to qualify for, as well as provides servicers a safe harbor from investor lawsuits over mods performed according to governmental guidelines – was passed by the Senate a week after the bankruptcy reform amendment was stripped. American Bankers Association Executive Vice President Robert Davis told reporters the safe-harbor provision is not a silver bullet, "because it only addresses the modification terms in the Obama planâ�¦It's helpful. But we still think there needs to be broader efforts." A recent study by Amherst Securities Group indicates that the overwhelming majority of modifications performed by a subprime servicer in March (492 out of 498) were repayment plans that did little to make borrowers' payments more affordable and cost investors money, but on the plus side, allowed the servicer to recapture P&I payments advanced during delinquency. The Amherst researchers dubbed these modifications "sham mods" and argued that if servicers are allowed a safe harbor, neither borrowers nor investors would benefit. Even FHFA Director James Lockhart said he believes a safe harbor isn't necessary. Rather, servicers are not doing enough with all the options they already have, Lockhart commented. What are your thoughts on a safe harbor? Will it clear the way for more meaningful modifications, or will it only accelerate unacceptable recidivism rates? And how would you assess the president's handling of the foreclosure crisis so far? – John Clapp, editor, [i][b]Servicing Management [


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