Sunday, May 6, 2007

Mortgage Industry Working on Foreclosure-Prevention Fixes

Congress and private lenders are looking to create new tools to help prevent mass foreclosures in the ailing subprime sector nationwide. Tomorrow on Capitol Hill, a House financial services subcommittee will discuss alternative programs to assist home owners who bought more than they could afford at the height of the housing boom, and who are now facing sharp payment increases they cannot afford.

Last week in the Senate, the Joint Economic Committee issued a report suggesting that the Federal Housing Administration (FHA) might play an important role in transitioning subprime borrowers out of high-cost, adjustable rate loans and into fixed rate government insured mortgages.

Private mortgage firms are also ratcheting up their own "loss-mitigation" efforts, reaching out to borrowers heading for-but not yet in-serious delinquency. EMC Mortgage Corp., a subsidiary of Wall Street bank Bear Stearns, announced creation of a roving 50-person "Mod Squad" team of loss-mitigation and workout specialists. Named after a popular TV program from the late 1960s-early 1970s, EMC's Mod Squad plans to work in dozens of cities with borrowers individually, and to reach out through community and credit counseling groups.

The squad's goal will be to modify the terms of mortgages to better fit borrowers' actual economic situations today. Among the optional forms of modification will be lowering interest rates, switching from floating-rate to fixed rate, restructuring payment schedules and deferring repayment of arrears. EMC is not offering the program solely out of the goodness of its heart, however. Foreclosures cost bond investors around $80,000 per case, whereas a loan modification may cost just a small fraction of that.

Tom Morano, global head of mortgages for Bear Stearns, said "proactively avoiding foreclosures can reduce the severity of losses, benefiting both homeowners and bondholders. (It's) a win-win proposition."

Meanwhile, attention is being focused on new foreclosure prevention concepts that go beyond loan modifications and do not require "short sales" of properties or deeds in lieu of foreclosure to satisfy the owner's debt. One idea is being discussed on Capitol Hill was proposed by a Virginia-based loss-mitigation firm, Lyons McCloskey LLC. The program is a variation of FHA's "partial claim" option, where money is advanced to bring a borrower's loan account current. The advance is structured as a second lien against the property, but carries no interest rate and must be paid from the proceeds of any future sale of the house.

In the Lyons McCloskey plan, seriously delinquent borrowers would be refinanced into fixed-rate mortgages insured or provided by FHA, the VA, Freddie Mac or Fannie Mae. The refi costs and any arrears on the previous mortgage would be treated as a "soft second" lien with no interest payments due. FHA would partially guarantee the second lien, and the bondholders or investors would assume the risks on the uninsured portion.

Full payment of the lien would not be due until the house sold or the homeowners had the financial wherewithal to pay off the debt.

The key to this program, according to Bob Lyons and Joe McCloskey of the loss-mitigation firm, is that it has the capacity to handle situations where borrowers are able to make mortgage payments at a lower interest rate, but are shackled with arrears that they can't afford to repay and mortgage balances in excess of the current home value.

Some legislation would likely be required for any FHA role in this or other new programs, but housing leaders in both the House and Senate appear ready to consider foreclosure-prevention remedies as part of pending FHA reform legislation.

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