Lawyers Call Modification Efforts a Failure

Lawyers Call Modification Efforts a Failure
NACBA, Valparaiso University release report
December 19, 2008

An attorney trade group has released a report that calls the voluntary effort by U.S. mortgage servicers to modify loans a failure. The structure of loan securitizations, threat of litigation and lack of cooperation from junior lienholders are creating roadblocks. The group is calling for cramdown legislation and court-supervised modifications.
Voluntary modification programs have so far failed, according to newly updated research released Thursday by the National Association of Consumer Bankruptcy Attorneys. The data was presented by Professor Alan White from the Valparaiso University School of Law and based on an analysis of more than 3.5 million securitized subprime and Alt-A loans — of which around 300,000 were in foreclosure.
White said many modifications offer only temporary relief. Data reported by the industry include modifications that defer payment shock negative amortization.
The structure of mortgage securitizations creates multiple owners that make voluntary modification impossible, the report said.
In addition, the threat of investor lawsuits hinder a servicer’s motivation to modify. Conflicting interests of investors from different tranches create concerns over disparity in losses. The statement indicated one servicer has already been sued by investors (MortgageDaily.com reported earlier this month that Countrywide Financial Corp. was sued by mortgage-backed securities investors over proposed modifications to as much as $80 billion in securitized mortgages).
The statement said owners of piggyback second mortgages — which were made on one-third to one-half of subprime mortgages originated in 2006 — have no incentive to waive their rights, while first-mortgage holders are reluctant to make modifications that would free up income to make the second-mortgage payment. But the trade group had no recommendation.
One other roadblock to successful modifications is inadequate servicer staffing. The traditional collector mentality of pursuing foreclosure upon severe delinquency conflicts with a needed approach that addresses each situation on a case-by-case basis. Collectors are often paid incentives based on foreclosures.
“Despite a proliferation of voluntary programs, we are not seeing evidence of a meaningful number of sustainable loan modifications,” NACBA President Henry Sommer said in the statement.
The report found that principal reductions occurred in less than 10 percent of loan modifications. In fact, balances on more than half of loan modifications increase because of capitalization of unpaid interest and fees. The professor’s analysis found average mortgage loan amount of $210,000 was increased by an average of $10,800 in capitalized costs.
But during November, 10 percent of modified loans saw some principal canceled, jumping from less than 2 percent for the 12 months ended June 30. Litton Loan Servicing and Ocwen Loan Servicing accounted for most of these modifications. The two servicers also accounted for most of the 8 percent of modifications that saw some write-off of interest.
“The variations among servicers in the number and quality of modifications are enormous,” White wrote. “This variation suggests that not every servicer is doing the maximum possible to reach and work out terms with every defaulted borrower.”
Payment amounts were reduced on just 35 percent of voluntary modifications, while 45 percent of modifications resulted in higher payments.
The Hope for Homeowners Act, which was projected to help prevent 400,000 foreclosures, has only generated 312 applications and no loan modifications, the report said. In addition, the HOPE NOW alliance has produced few results, with principal reductions or payment decreases made on few loans.
Even the FDIC’s IndyMac streamlined modification program — which has reportedly resulted in 7,200 modifications — was criticized for not reducing principal “debt in any meaningful way.” And FDIC Chairman Sheila Bair’s recently announced program that guarantees half of loan losses if the payment is modified by at least 10 percent would likely see little interest because of similar problems inherent in other unsuccessful programs.
The association cited a projection from Credit Suisse of more than 8 million U.S. foreclosures during the next four years — a 16 percent foreclosure rate. Credit Suisse reportedly projects the subprime foreclosure rate to reach 59 percent.
White said the country’s $10.5 trillion in residential mortgage debt has soared 250 percent from 10 years ago. He recommended wiping out excess mortgage debt and de-leveraging borrowers.
The attorney trade group is calling for court-supervised modifications.
In addition, the press release quoted National Consumer Law Center staff attorney Alys Cohen as supporting the empowerment of bankruptcy courts to modify loans.
“Congress should lift the ban on judicial modification of primary residence mortgages, as part of the solution to stemming the tide of avoidable foreclosures and stabilizing the housing market and the broader economy,” Cohen said in the statement.
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