Meeting with leaders on Wall Street, Treasury Secretary Henry M. Paulson yesterday proposed that the HOPE NOW Alliance expand its efforts to assist borrowers who took out adjustable rate mortgage loans, even if those borrowers were not “subprime.”
Mr. Paulson stated:
After years of unsustainable price appreciation and lax lending practices, a housing correction was inevitable and necessary. That correction is underway. Over the next two years, we also face an unprecedented wave of 1.8 million subprime mortgage resets, raising the potential of a market failure. Because the industry does not have the capacity to manage this volume, without action, unnecessary foreclosures would result.
To meet this challenge, this Administration ?without committing any taxpayer money ?helped foster an industry-wide effort to prevent this market failure. By preventing avoidable foreclosures, we will safeguard neighborhoods and communities, and fulfill our primary responsibility of protecting the broader U.S. economy. However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years.
Mr. Paulson went on to explain how the HOPE NOW Alliance strives to avoid “preventable” foreclosures. The Alliance takes a three pronged approach.
First, the alliance is aggressively reaching out to homeowners who are or will be struggling with their mortgages.
Second, industry and government are developing new mortgage products that will enable more people to stay in their homes.
Third, the industry has developed a systematic streamlining process that replicates normal market actions to fast-track borrowers towards a solution, when possible. The industry needs this streamlining to manage the unprecedented volume of resets that cannot be addressed through individual, loan-by-loan negotiations.
Mr. Paulson noted that critics of this third prong assert that it abrogates contracts with investors. To the contrary, he argued, servicers fulfill their contractual obligations by pursuing “all loss-mitigation options when it is in the best interest of investors,” as their contracts typically provide. Investors participate in this approach because they recognize the benefits of avoiding preventable foreclosures.
According to Mr. Paulson, the HOPE NOW Alliance now represents more than 90 percent of the subprime servicing market, including the 20 largest subprime servicers. The Alliance also involves major non-profit mortgage counseling organizations, trade associations and investors.
Mr. Paulson pointed out that limiting the damage was not an easy or simple task, but the Alliance participants had been hard at work over the last several months.
The first step has been to contact troubled borrowers. In its first two months, the HOPE NOW alliance sent over 450,000 letters to at-risk borrowers who had not previously contacted their servicers. Servicers estimate that, as a result of this effort, approximately 10 percent, or 45,000 homeowners, have called their servicers to see if foreclosure can be avoided.
Servicers are also moving to quickly implement the framework for streamlined refinancings and modifications announced by the American Securitization Forum (ASF) ?which represents mortgage market participants, including many of the largest investors. This is not simple; there are legal, accounting and operational considerations. Servicing departments need to link with mortgage originators; this can be difficult for independent servicers. And they must fully implement connections to FHA. Servicers are collaborating to share best practices so all borrowers and investors may benefit from the ASF framework, regardless of who their servicer happens to be.
Last Friday over 20 HOPE NOW alliance servicers gathered to work through implementation details, and will continue an intense pace in order to establish the necessary infrastructure and processes. We expect most servicers to begin fast-tracking borrowers in the next few weeks.
The Treasury continues to monitor the matter, and work with the various participants to see that the Alliance best achieves its goals without a taxpayer bailout.
Then, in a somewhat subtle hint, Mr. Paulson suggested the Alliance also assist non-prime borrowers:
We need to see all servicers reporting results to HOPE NOW to measure effectiveness and then make adjustments as needed. This may include using elements of a systematic approach for adjustable-rate mortgages other than subprime if it will benefit homeowners and investors.
This appears to be the first official acknowledgement by the Treasury that the problems facing subprime borrowers also challenge Alt-A and prime borrowers.
The problem stems in many ways from inflated real estate prices, low interest rates and lax lending standards. Subprime generally refers to borrowers with low credit scores.
But aggressive borrowing was not limited to low credit score applicants in recent years. Across the country, millions of homeowners stretched to buy expensive homes over the last several years while rates were low and prices high. Frequently, the easiest way to do this was to take out an ARM loan with a low introductory rate. Those rates reset whether the borrower has high or low credit ratings. If the borrower lacks the cash to make the monthly payments, there will be problems.
For its own part, the industry quickly backed Mr. Paulson’s suggestion. Today’s Wall Street Journal (paid subscription required) reported that the American Securitization Forum:
which represents investors who have bought mortgage-backed securities. Without the investors’ approval, mortgage-servicing companies that collect the checks from borrowers run the risk of litigation if they relax the loan terms.
“To the extent that servicers can develop and apply systematic approaches to assist them in their efforts to identify appropriate loss mitigation outcomes for adjustable rate mortgages other than subprime, we support those efforts,” George Miller, the group’s executive director, said in a statement released after Mr. Paulson’s speech.
While imperfect, the investors understand that an approach that limits their losses makes the most sense.
Naturally, this approach will not sway those who have called for bailouts. The National Community Reinvestment Coalition, for example, responded with a simple statement suggesting the culprit was not high prices and excessive borrowing, but rather “unfair and deceptive lending practices.” A number of groups, and some presidential candidates, have called for forced permanent extensions of low teaser rates, taxpayer funded bailouts, and other heavy handed approaches.
For my own part, I’m wishing I had not paid off my ARM so quickly.
Tags: Consumer Protection, Mortgage Banking - General, Subprime Lending by the Editor
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