REQUIRED READING: Since mid-2006, when borrowers began to fall behind on their mortgage loan payments at a rapidly accelerating pace, servicers have been faced with unprecedented losses, dramatic market changes and sweeping government programs designed to help distressed homeowners. Unfortunately, despite Herculean efforts to mitigate and remedy the flood of delinquent loans, borrowers continue to default on their mortgage loans at historically high levels.
The challenges for servicers have been as tremendous as the magnitude of the problems driving them: dramatic personnel recruitment, training and retraining demands, unprecedented regulatory and compliance requirements, skyrocketing operating costs and a rapidly deteriorating housing market that has reduced the value of collateral assets by up to a third or more in many areas of the country.
At the same time, servicers have also continued to evolve and adapt to the radically shifting mortgage environment. They have attempted to reach out to borrowers in new ways, worked to better understand the cause of their difficulties and sought creative solutions to help them stay in their homes. Federal and state governments have also announced wide-ranging programs to help servicers assist distressed homeowners, but thus far, no silver bullet has been found.
While it is clear that a great deal of work has already been done, millions of homeowners still struggle to meet their mortgage obligations. Much more will be required to survive this crisis, but to understand where the industry is headed, it is instructive to review where it has been.
The birth of federal mod programs
Shortly after taking office, in February 2009, the Obama administration announced the creation of the Homeowner Affordability and Stability Plan (HASP), which was aimed at stabilizing the housing market and helping the nearly 3.6 million American homeowners who were in default or at risk of default on their mortgage. The program had two primary components: The Home Affordable Refinance Program supported government-sponsored enterprise (GSE) loans by helping borrowers refinance into loans with lower interest rates, and the Home Affordable Modification Program (HAMP) supported non-GSE loans to allow homeowners who are delinquent or at "imminent risk of default" to modify their loans and stay on track.
However, this was not the first effort to help stem the rising tide of mortgage delinquencies and foreclosures. After the number of noncurrent mortgages continued to increase starting around July 2006 – roughly the same point in time when home values began an equally steep decline – the American Securitization Forum rolled out its Streamlined Foreclosure and Loss Avoidance Framework. Announced Dec. 6, 2007, this program encouraged servicers to proactively initiate discussions with homeowners who had adjustable-rate subprime mortgage loans. The goal was to preemptively modify loans poised for payment increases associated with interest-rate resets, as long as borrowers were in relatively good standing on their mortgages and met other program requirements.
The next loan modification program arose from the IndyMac failure and takeover by the Federal Deposit Insurance Corp. in July 2008. The agency originally developed a loan modification program to help homeowners who were more than 60 days delinquent and had a mortgage serviced or securitized by IndyMac. Known as the "Mod in a Box," this program used net present value to determine whether a loan should go to foreclosure or be modified. For loans that were to be modified, the program included a cascading waterfall of steps designed to help lower the front-end debt-to-income ratio (DTI) of homeowners to no more than 38%.
In October 2008, the Bush administration announced the Hope for Homeowners Program (H4H), which allowed homeowners with a Federal Housing Administration (FHA)-insured mortgage loan to refinance as long as they met certain criteria, such as a front-end DTI in excess of 31%. Yet despite the efforts associated with this program and the ones that preceded it, the combined number of delinquent loans and loans already in foreclosure rose to a staggering 11% of all mortgages by December 2008.
When the Obama administration launched HAMP in March 2009, there were high hopes that it would help the majority of distressed homeowners get back on track and stay in their homes, but the numbers tell a different story. According to statistics published in the January 2011 report released by the U.S. Department of Housing and Urban Development and the U.S. Department of the Treasury, fewer than 1.7 million HAMP trial modifications had been started from the program's inception through the end of 2010, and about half of those failed before converting to a permanent modification.
Alternative modification programs
Although certainly well intentioned, the original loan modification programs were insufficient in addressing the default tsunami that continued to plague the country. With the challenges mounting and the nature of borrower struggles coming into sharper focus, the federal government began to develop and release a series of program revisions and alternative modification options almost immediately following the early 2009 launch of HAMP. By late April 2009, the Treasury first revised the HAMP program by announcing that servicers should consider loans for the H4H refinance program as an option in the waterfall of programs to assist borrowers. The financial incentive for servicers to go this route was $1,500 more than for the original HAMP waterfall modification, and servicers attempted to refinance homeowners who could qualify for this solution.
By this time, the increase in distressed home equity loans also became an area that required the attention of the Treasury, though the rate of home equity defaults lagged that of first-lien mortgages. It became clear that loan assistance for home-equity products was also needed, and by August 2009, the Treasury Department released the details of another HAMP enhancement, called the Second Lien Modification Program. This revision allowed for a second-lien loan to be modified under the same terms and conditions as the first-lien modification associated with a specific property.
By April 2010, the Treasury Department's Home Affordable Foreclosure Alternatives Program (HAFA) took effect to further complement HAMP. This program was designed to help borrowers who could meet the eligibility requirements of HAMP but who were unable to keep their homes due to other hardship constraints. HAFA provides borrowers, servicers and investors with financial incentives that are triggered when these defaulted loans are resolved through short sale or deed-in-lieu of foreclosure transactions, and also releases borrowers from any future liabilities associated with their original mortgage loans.
The Treasury then introduced guidance about the Principal Reduction Alternative (PRA) in June 2010 (later updated in October 2010). This option offers financial incentives to investors that agree to forgive a portion of the principal owed on a first-lien mortgage or second-lien loan. The alternative is designed to help borrowers who owe significantly more on their mortgages than their homes are worth. However, the PRA is only available for loans not owned by Fannie Mae or Freddie Mac or guaranteed by any federal agency.
July 1, 2010, was the effective date of the Home Affordable Unemployment Program, yet another modification alternative. This program enables servicers of first-lien mortgage loans (that are not owned or guaranteed by Fannie Mae or Freddie Mac or insured or guaranteed by a federal agency) to provide loan assistance to borrowers who are behind on their payments due to unemployment. The assistance is in the form of payment forbearance, but the borrower must apply for the assistance before becoming seriously delinquent.
Of course, Fannie Mae and Freddie Mac represent about 60% of the mortgage market and have their own versions of the mortgage assistance programs and alternative options. Fannie Mae has HAMP-related offerings, an alternative modification program, a second-lien program and a forbearance (unemployment assistance) program. Freddie Mac also offers HAMP-related provisions, a backup modification alternative program, a "Cap to Reinstate" program that enables servicers to capitalize missed payments under certain conditions and a HAFA-related program. These are agency-specific borrower assistance programs, as are the programs offered by the Department of Veterans Affairs, the FHA and the Rural Housing Service.
Where we're headed
As the 2012 sunset date for many standard and alternative modification programs approaches, it may also become clear that more time is needed to ensure that everyone who can be helped benefits from the options that have been developed. Even more likely is the possibility that additional alternatives will be announced in the months ahead.
While nothing for certain has been announced as of this writing, as the rate of modifications slows and foreclosures rise, it is almost certain that new programs or changes to existing programs will occur to try to prevent loans from going to foreclosure. Some have speculated that Fannie Mae or Freddie Mac may offer principal forgiveness in the future, though the agencies have not announced anything to that effect.
The mortgage industry is in a completely different place than it was in July 2006, and many more changes are likely to come. Those that have survived thus far have done so by constantly reinventing their organizations while strengthening their focus on the fundamentals.
Caroline Ritchie is vice president of product strategy for Lender Processing Services' mortgage servicing division. She can be reached at exec.author@lpsvcs.com.
