Wednesday, March 30, 2011

5-Part Series, Digging Out of America's Foreclosure Mess; Part 3, New Government Programs

Photo Credit - Flickr Common
Loan modifications have failed. The federal government put together an ineffective and grossly mismanaged Home Affordability Modification Program (HAMP). The lenders did not really want to modify loans.

In reality, the federal program pushed temporary modification trial programs that had little incentive to move them to permanent modification status.

The homeowners submitted the same paperwork over and over again in the approval process, and then they were denied the loan modification most often anyway. Those few homeowners that were approved many times ended up defaulting on the lower payments.

The HAMP was designed for a lower payment on the primary mortgage or the first lien on the home. Very few servicers of second liens have agreed to participate, and no second liens have been modified. For homeowners with second liens, the lower payment on just the first lien may not be enough to get them back on track in keeping up with payments.

The HAMP also did not take into account the ability of a lender to modify loans based on government regulation and financial rules already in place. The first lien holder may give up a first position to other lien holders if the second (or third) lien holder did not participate in an agreement to modify the first lien. The lender must also take losses once a loan is modified. This could result in significant financial and regulatory capital reserve problems for several financial institutions.

Another reality is when homeowners have no job or employment stability, they cannot make a mortgage payment no matter how much they may want to or how low the payment. Five dollars is a lot of money if one needs it and doesn’t have it. Adding to the mix is an already strained homeowner paying the contracted $5 for something they know is only worth $3 now.

The lenders have been their own worst enemies in the foreclosure mess. Their bad behavior in not working with loan modifications in good faith, dragging their feet on modification approval to extend penalty fee revenue, robo-signing foreclosure paperwork, and the lingering sentiment that they caused the housing mess to begin with has left them in a position for maximum public outrage and more government intervention.

The Obama administration and Treasury may or may not have learned from the HAMP disaster, but they are already planning on new government intervention programs aimed at the loan servicers. They are looking at forcing loan balance reductions for underwater mortgages with loan servicers developing their own mortgage modification programs.

Further, they want to specify the cost of reducing loan principle be paid by the loan servicers themselves and not by public or private investors that bought mortgage-backed securities.

How easy it is to ignore one of the main reasons the HAMP failed so miserably was because loan servicers did not really want to modify loans and had a financial incentive not to in reality.

Perhaps the average loan servicer has had a change of heart. Perhaps they will jump at the change to not only modify loans to ensure lower payments but reduce the principle to reflect value loss too. And this time the cost would not be government paid but loan servicer paid.

That won’t cause any problems for a new government program or new regulation, will it? The average consumer will be helped not hurt, right?

Perhaps Treasury has in fact learned from their mistakes in the HAMP experiment - or maybe not.

This new program would have the loan servicers write down loans they serviced on behalf of Fannie Mae and Freddie Mac. Perhaps the inherent conflict-of-interest the Congressional Oversight Panel (COP) noted in their report “A Review of Treasury’s Foreclosure Prevention Programs” has been solved. You remember:

“Treasury has essentially outsourced the responsibility for overseeing servicers to Fannie Mae and Freddie Mac, but both companies have critical business relationships with the very same servicers, calling into question their willingness to conduct stringent oversight.”

“Freddie Mac in particular has hesitated to enforce some of its contractual rights related to the foreclosure process, arguing that doing so “may negatively impact our relationships with these seller/servicers, some of which are among our largest sources of mortgage loans.” Treasury bears the ultimate responsibility for preventing such conflicts of interest, and it should ensure that loan servicers are penalized when they fail to complete loan modifications appropriately.”

In addition to the federal government looking to impose new programs on loan servicers, several states are looking at new ways to impose principle write down programs for underwater mortgages.

Some are also looking at funding local loan modification programs with civil fines in excess of $20 billion being levied on loan servicers for their misdeeds. The fines could come as a requirement to write down loans. Democrat Tom Miller, Iowa Attorney General, is leading a national effort for all 50 states.

States have been hurting for a while. They know the unrelenting high unemployment has their citizens hurting too. Four of the hardest hit (Arizona, California, Florida, and Michigan) have been looking for ways to make mortgage payment easier for some for a while.

According to a article last May, “States have radical ideas to stop foreclosure.”

In all honesty, isn’t it government intervention with unsound mortgage practices and housing regulation a big part of what led to the financial crash and housing bubble burst to begin with? Will new government programs, to replace the already failed first government try the HAMP, lead to salvation now or just more problems in the free market system?

Will new government programs now pick winners and losers among citizens as well as the financial sector? Do these new government programs make sense? Will lenders work around them as they did HAMP?

Our real world real estate professionals want to see America dig out of the foreclosure mess with sound investment strategy and socially conscious innovation. Massachusetts real estate attorney Elliott Topkins of Topkins & Bevans and lender and asset manager Bryan Ganz, CEO of ScudderLLC Bay Capital, share their expertise.

Do they believe the state and/or federal government intervention in imposing underwater mortgage principle write downs will work?

Realtors Resource Blog author Elliott is optimistic on the proposal. “Yes, and it will get the real estate market moving again, because sales can be made without getting lender consent.”

Bryan advises, “I do not believe it is necessary for the government to cover the banks’ losses. The banks have already reserved against their nonperforming loans. They have plenty of incentive to get these loans re-performing, even if they have to write down the principal amount of the loan.”

He continues, “What the government needs to do is to stop taxing institutions on ‘phantom income’ when they modify a loan. This is an absurd provision of the tax code and needs to be corrected.”

Bryan notes, “In addition, the single most important thing the government could do is to create a secondary market for these modified or refinanced loans by having Fannie and Freddie to buy the loans. This would be significantly more impactful than using taxpayer dollars to pay down underwater loans.”

How can fairness to “all homeowners” be assured in any principle write down government plan. Should it be?

Elliott comments, “Fairness to all consumers in general involves proper lender accountability. They have been and continue to run amok as far as I can see.”

Bryan pulls directly from his current lending and investing experience, “My company only works with deserving homeowners. While this is the majority of homeowners, there is definitely a group that is trying to take advantage of the crisis in order to live in their home payment free.”

“The first thing is to figure out which homeowners are willing and able to make their mortgage payments if their mortgage were modified to reflect the current value of their home. We must then do everything to encourage the modification or refinancing of these loans at a principal amount that reflects the current value of the home.”

Bryan offers, “The modification could certainly contain a claw-back provision, so the bank could recover some of their loss if real estate prices recover. For those homeowners that cannot afford to stay in their home, even at today’s reduced value, everything must be done to help these people transition to more affordable housing. This would include banks providing financial assistance, so these homeowners could afford to move and put down first and last month’s rent as well as a security deposit.”

“The federal government should also consider allowing a rental deduction similar to a mortgage interest deduction. We have long encouraged home ownership. We now need to be encouraging people to give up their home if they can no longer afford the payments and move to a rental property they can afford.”

Bryan concludes, “While modifying mortgages for people that stop paying may seem unfair to those homeowners that continued to make their payments, in the end these homeowners will benefit indirectly as the value of their home will not continue to decline. The economy as a whole will recover more quickly. Also, those homeowners that receive a modification will have to deal with damaged credit for years to come.”

How can fairness to “all taxpayers” be assured in any principle write-down government plan. Should it be?

Elliott considers the bigger picture view for the stabilization of the real estate market and asset wealth in mind. “That is a hard one. This needs to be marketed as no less important than the credit crunch of 2008. Everyone must understand we are in danger of prolonged free fall.”

Bryan’s view comes from his company Scudder Bay already having thought out these questions. “The programs I am proposing should not cost the taxpayer anything. Banks have already reserved against these nonperforming loans as I mentioned. Banks should not need any funds from the taxpayer to have an incentive to modify these loans."

Bryan knows, "Realistically, the banks really don’t want the homes. They simply need to find a solution. They cannot sit with a nonperforming loan on their books indefinitely.”

Should homeowners and taxpayers that do not have any housing payment or mortgage value ratio problems care about those Americans that are having problems?

Elliott sees this question as a question of humanity first in opinion formation. “I am concerned both as a human being and a citizen that we need to address this problem in a way that does not give the lenders all the cards to play. I was encouraged by what I read of Elizabeth Warren’s recent testimony before the House. She has some brains, and she is courageous.”

Bryan believes being socially conscience and of sound business practice are not exclusive. “This is a problem that will affect everyone and everything. If millions of additional homes are lost to foreclosure, the real estate market will remain depressed for years. Not only will this negatively impact housing prices nationally, it will hamper any meaningful economic recovery for all people, business, and government.”

Visit tomorrow for Part 4, Socially Conscious Private Investment

Part 1 - Prolonged Pain

Part 2 - Failed Government Intervention

Part 4 – Socially Conscious Private Investment

Part 5 – Working Investor Solution

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