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Loan Modifications . . . Where is the Decider?

posted by John Rao

Thanks to Bob Lawless and the crew at Credit Slips for this opportunity for the guest blogger spot for the next week. I'll begin with a something on the mortgage foreclosure crisis. Don't worry, I will touch on other subjects as well.   

Finger-pointing among mortgage industry players in the current foreclosure crisis has really gotten quite interesting. Some of this has helped to validate what consumer advocates have been saying for years. A fine example is the letter recently sent by the Consumer Mortgage Coalition, a trade association of large national mortgage lenders and servicers, to Chairwoman Sheila Bair of the Federal Deposit Insurance Corporation. The letter describes problems in the securitization structure which prevent loan modifications from being made. 

Let's step back for a moment. I can remember representing homeowners facing foreclosure in the days when a good number of mortgages were actually serviced by the banks which made the loans. You could call the local bank and speak with someone with authority to make a deal (we didn’t call it loss mitigation back then). But as the collection of mortgage loans was increasingly handed over to large national mortgage servicers during the late 1980s, that direct connection was lost. Homeowners and those assisting them now had to navigate through vast voice mail systems, bouncing from one department to another, in search of someone in the servicer shop who might possibly provide some reliable information about the mortgage account. (Even Judge Posner described this process of trying to get through to an 800 number as a "vexing and protracted undertaking" in Miller v. McCalla, Raymer, 214 F.3d 872, 875 (7th Cir. 2000)). While homeowners on their own often understandably gave up in frustration, housing counselors and attorneys could get deals struck if they bypassed the normal system and knew who to call.

But things got much worse when private securitization of subprime mortgage loans took off in the 1990s. Lacking the structure for loss mitigation imposed by the FreddieMac and FannieMae servicing guidelines, the common refrain heard from servicers of these loans was that the pooling and servicing agreement doesn't let us do that and the investor won't let us anyway. But we would ask, "have you checked with the investor, and by the way, who is this investor?" Master servicers and trustees in these complex arrangements seemed only to push papers (and money) around, providing reports to keep investors happy. It often seemed as though no one was in charge when it came to loan workouts.

This brings us to the recent focus on loan modifications. Earlier this year on June 6, at the annual meeting of the American Securitization Forum, FDIC Chairwoman Sheila Bair urged investors to be flexible in granting modifications of troubled loans. "The immediate task is to sustain homeownership by ensuring that servicers have the flexibility they need to make prudent loan modifications, if it is reasonably foreseeable that a loan may default," she said.  This came after testimony Chairwoman Bair had provided at a House committee hearing on April 17 in which she outlined the many structural problems with private securitizations which hamper loan mods. 

Obviously frustrated by the slow pace of loan mods as shown by the Moody's report (survey of 16 subprime loan servicers found that only 1 percent of loans subject to rate reset in first six months of 2007 had been modified), Chairwoman Bair stepped up her call for action in a speech earlier this month on October 4. For homeowners current with payments who have adjustable rate mortgages that have not yet reset, she called on servicers to convert the loans to a fixed rate. She said: "Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it." Chairwoman Bair expressed concern that the process should not get bogged down by the need for individualized decision-making: "We can't just sit here doing this kind of case-by-case, laborious restructuring process with all these millions of subprime hybrid" adjustable-rate mortgages.

A modest proposal you might say. Certainly not one that could solve the entire mortgage problem since many homeowners are defaulting on these loans even before the first rate reset. But it forced the servicing industry to come clean with proof of what we have long suspected. In a response to Chairwoman Bair, the Consumer Mortgage Coalition described a structure devoid of any warm bodies to make decisions. For private securitizations, the CMC complained that there is simply no active manager the servicer can call to get approval on a loan mod or a waiver of restrictions on mods typically found in the pooling and servicing agreements. "While this passive structure may appear to give the servicer more discretion, in fact, because of the lack of an active decision-maker from which the servicer could obtain waivers of the usual requirements, no entity exists with the authority to grant waivers," the CMC said in its letter.  "As a result, a servicer that violates the terms of the PSA faces potential legal action from the securitization trustee and even from the securities holders themselves."

Curiously, despite this incredible admission that "no entity exists" to make a decision, the CMC nevertheless urged the FDIC to back off from its call for system-wide mods, stating that the loan-by-loan approach is preferable. That of course would seem to guarantee that loans mods will never be made. 

Perhaps there is a way to reconcile the servicers' desire for loan-by-loan mods with their problem of not having anyone to turn to for a decision. One solution is to give bankruptcy judges the authority to make decisions on individual loan modifications by eliminating the special protection for home mortgage creditors in the Bankruptcy Code. But more about that later in the week.


Wall Street and investors. They are in control of this whole mess and usually have the final say if a loan can be modified or not. Right now, investors refuse to modify these loand because they stand to lose more by working with a borrower or agreeing to some type of short sale.

This situation is complicated by the fact that these Mortgage Back Security (MBS) holders (INVESTORS) have insured against defaults, and the insurance payout on a default is a better result for the investor than accepting reduced returns. So the investor may actually be better off with a default as opposed to a mod.

In this circumstance, the investor can take the position that a mod goes against their best interests and threaten suit against the servicer if mods are undertaken.

Investors are screaming bloody murder about potential mods that will wreck their insurance payout.

When they bough these MBS's they immediately insured them, so they will win either way. They stand to lose nothing. Unless the insurance companies don't pay up.

Insured municipal bonds favored by retail investors are unlikely to lose their value even though financial guarantors face credit risks related to the faltering U.S. subprime mortgage sector.

The same companies that guarantee repayment of interest and principal if a city or county defaults have also been insuring mortgage bonds or collateralized debt obligations backed by home loans to consumers with subprime or poor credit.

Also lenders and servicers are not working with borrowers because this means they would have to report MASS losses to their investors and in turn cause panic in the market. Making their stock worthless. So, they stalling and making homeowners lives hell to protect what little value you they have left.

Hedge funds by nature do not need to disclose their losses or net asset value. There are HUGE losses that have not been disclosed, including cities, counties, pension funds, and bank money market funds that are NOT FDIC insured.

Our country and homeowners are being held hostage by these investors, Wall Street, that have got rich off of predatory loans and now they are STILL getting rich off of the foreclosure crisis and people losing homes. They win either way and we will lose unless we expose the real reasons for this mess.

I call it, "The Great American Homeowner Swindle".

It will be interesting to see who signs on to this.


Homeowner Advocate

John's post addresses what strikes me as one of the most crucial empirical questions about today's mortgage market--from a logistical standpoint, how feasible is it for a consumer to do a loan workout on their mortgage?

Many of the policy proposals incorporate a vision of the lenders or servicers whose agents have a pulse and a brain, are empowered to act, and have a support structure to guide them. This is the "active decision-maker" model that John references. Recently servicers have been aggressivley trumpeting their customer orientation. For example, at a panel presentation at the National Conference of Bankruptcy Judges this past Friday, a vice-president of Wells Fargo offered to give anyone in the audience (which numbered a couple hundred people) her corporate cell phone number to show how committed Wells was to working with consumers. And in a Sept. 19, 2007 letter to Senator Leahy opposing the proposed amendment to the bankruptcy code to permit loan modification, the lenders claimed that "[c]ompanies work one-on-one with customers who have fallen behind on their payments, often up to the actual point of foreclosure, on options to keep them in their home."

Yet, many consumers report that they cannot get anybody on the phone that has authority, that sometimes they have difficulty figuring out who even to contact, and that they are unable to execute foreclosure alternatives like a short sale because of problems in getting the lender to agree to or follow up on prospective bids. Figuring out which of these views is the dominant reality seems critically important to evaluating the competing proposals about what, if anything, the government should do to help struggling homeowners.

JOhn's comments are great as always but he fails to mention the fact that mortgage servicers simply make more moeny with defaulted loans than with performing loans. The servicers get to keep all of the fees, charges, and expesnes assocaited with a non-peforming mortgage. As a result, they have no incentive to engage in any form of loss mitigation or loan modifications. The investors offer as little as $250.00 for each modificaiton and the servicers can make that much or more with 2 bogus BPOs and 1 PI. Look out for a multitude of investor suits against the servicers.

Max and the above commentators are much like the blind men and the elephant - each propounds the part of the creature they have come in contact with represents what an elephant is like.

But instead of separate and distinct parts which appear to be something else, the lending elephant is a highly-integrated industry with almost absolute influence over the body politic that is supposed to regulate, or at least oversee it.

The reality is, there was so much money to be made so quickly that the industry attracted that percentage of people who are willing to compromise their moral values to the degree they would take advantage of other people. And some of them would join together and pay others to protect the interests of their companies. State Houses and especially, Washington, won't ignore lobbyists with deep pockets.

And as long as it was profitable, almost everyone was, and for the most part, still is, willing to turn a blind eye to the enabling behavior some corporate cultures engender. The "we deny any wrongdoing" mantra in settlement agreements with the AG's, FTC, etc., has let hundreds or even thousands of what would ordinarily be common criminals keep their Rolex's, BMW's, vacation homes, retirement accounts, etc., that they willingly conspired to obtain with money taken from millions of Americans they took advantage of.

These things can't function at this level in a non-symbiotic, non-conspiratorial vacuum. One company can't do these kinds of things without the implicit assistance or support from others. From raters who deliberately turned a blind eye to servicing abuses to law firms who knowingly filed unconscionable foreclosures to REO brokers who paid kickbacks, it takes a certain kind of moral turpitude to keep turning the handle on the sausage grinder.

I'm particularly fond of one commentator's reminder that every foreclosure results in yet another loan origination.

Does that shed some light on why it has gone on as long as it has?

The lawsuits Max alluded to are just getting started, but there won't be as many as one might think. Some of the players won't file suit because they'd be coming to the table with unclean hands. Many of them will simply take their winnings and disappear into some other line of work.

Those cultures are being exposed. It appears insiders or ex-employees are getting the word out:


Dave Mortensen
Co Author, The Mortgage Survival Kit

I tried for several months to do a loan modification. I was constantly hung up on, transferred, and put on hold for long periods of time. Then I heard from a friend that a company out of Michigan, MIZNA , had helped her complete a loan mod with Wells Fargo. Apparently, MIZNA has a good relationship with some lenders and completes many loan mods as a result. I gave them a call and they were so caring and helpful. They walked me through the process and helped me complete my loan mod. I would recommend this company for anyone facing foreclosure. Here is their contact info: MIZNA - 888-MY-MIZNA - www.mizna.com .

I am wondering if anyone has had any luck with American Home morgtage - I have an option arm that will reset in 3yrs - Problem is due to declining values I am under water - I want to be proactive and get a mod into a fixed rate now, rather than continue to invest in this house when I know the time will come to refi and I ahve no options? How do I approach AHM

I am in the same boat with American Home Mortgage. I tried talking to them about loan modification before and they would not offer me anything because I wasn't late on my payments and they told me I could continue to make my minimum payment for four more years. In four more years I will owe $700,000 on a house that is only worth $400,000 right now!

Today I called AHMSI and they told me to call them back with my income and expenses. They said they would then give me a list of documents to fax to them. After that they said a negotiator would call me back within 14 days to let me know if the "investor" approved the loan modification application.

I have had one phone call from a company with an attorney who deals with mortgage companies to get you a loan modification.

I am in the middle of a loan modification with GMAC on my rental house and it has been six months so far and they don't call me back! They are offering me a really good loan mod, but they are taking too long! I am so frustrated with GMAC! I can only expect AHMSI to be just as bad!

Should I hire a company with an attorney to deal with the loan mod?


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