As things grow chilly across the nation, I'm sure I'm not alone in wondering just where the summer went. Remember August? For a two-week span, Michael Phelps was the most talked about person in the country, if not the world. The question of who was to be the Democratic presidential nominee was, more or less, still up in the air. And Countrywide couldn't go a week without being sued by a state attorney general.
Now it's the fall – almost two full months later – and Phelpsmania still runs wild via his countless endorsement deals. Barack Obama was given his party's nod and is now embroiled in a much larger political contest. And Countrywide, though no longer at the receiving end of weekly lawsuits, is still very much in the news.
Yesterday, in part to resolve the numerous state AG lawsuits, Bank of America unveiled a home retention program that aims to modify troubled loans for approximately 397,000 Countrywide customers. Similar to the Federal Deposit Insurance Corp.'s (FDIC) plan for bad IndyMac loans, the BofA approach is touted as "systematic."
It will leverage the U.S. Department of Housing and Urban Development's recently rolled-out HOPE for Homeowners program (c'mon, do we really need two all-caps HOPEs in town?), interest rate reductions and – in perhaps the truest sign of reform – principal reductions on some pay option ARMs.
In a case of bad timing, Bank of America's program launch landed on the same day as the release of the State Foreclosure Prevention Working Group's third report on subprime servicers' performance. The group's conclusion was not a promising one.
The overwhelming majority of seriously delinquent borrowers do not appear to be moving in the correct loss mit direction (eight out of 10, as compared to the seven-out-of-10 finding in April, says the group). The use of loan mods has peaked, and the number of new efforts appear to be on the decline. The short sale-to-modifications in process ratio has balanced out (i.e., less home retention). Oh, and one out of five modifications made in the last year is now delinquent.
"We are troubled that more homeowners are not receiving enough meaningful assistance to avoid unnecessary and preventable foreclosures," the working group's leader, Iowa Attorney General Tom Miller, said in a press statement. "While banks and Wall Street firms continue to report record write-downs of mortgage loan portfolios and securities, the losses do not appear to be flowing down to the homeowner in the form of sustainable loan modifications."
Alan White, an assistant professor at the Valparaiso University School of Law (and next week's Person of the Week), released a paper in September titled "Rewriting Contracts, Wholesale: Data on Voluntary Mortgage Modifications from 2007 and 2008 Remittance Reports." I asked White why servicers' modification efforts have not, generally speaking, been deep enough.
"I think servicers are reluctant to do more modifications in part because of fears about re-default rates, and they are modeling cashflows based on historical performance, which is now irrelevant," White responded. "As the industry starts to look at re-performance and re-default rates in a more fine-grained way, perhaps servicers will feel more confident about taking the more aggressive approaches."
Whether the FDIC and Bank of America are on the right track with their systematic approaches remains to be seen. But if their attempts do indicate early and inarguable signs of success, perhaps they'll be able to serve as a model for servicers nationwide.
