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Will the Mortgage Industry Fix the Mortgage Mess Itself? A Look at Project Lifeline

posted by Adam Levitin

The mortgage industry has been arguing against bankruptcy reform legislation that would permit the court-supervised modification of single-family principal home mortgages in bankruptcy. The industry argues that permitting mortgage modification in bankruptcy would result in higher interest rates and that its private efforts will solve the problem. In an earlier post and in a working paper, I have shown that we are unlikely to see higher interest rates as a result of allowing bankruptcy modification. Here, though, I want to take issue with the mortgage industry’s claim that its private efforts will solve the problem.

Hopefully the mortgage industry is correct about this. But there is good reason to doubt the efficacy of the industry’s efforts. To date, the mortgage industry’s efforts to fix the foreclosure crisis have been a lot of sizzle, but not much steak. Unfortunately, this seems to be the case with Project Lifeline, the latest half-measure to come out of the mortgage industry. As I explain below, the very structure of Project Lifeline means that homeowners in a significant number of states will be unable to take advantage of Project Lifeline's meager offering because it will kick in only after their homes have been sold in foreclosure.

The mortgage industry’s efforts at cleaning up the foreclosure mess have been coordinated through a private consortium of the largest mortgage servicers, called the HOPE NOW Alliance, which provides a clearing house for homeowners to reach servicers to attempt to work out deals on troubled mortgages. The HOPE NOW Alliance’s most recent effort, called Project Lifeline, was rolled out today with much hoopla. Project Lifeline is likely to have have very little impact. Despite its endorsement by the Treasury and HUD Secretaries, Project Lifeline is a voluntary private program of the six largest mortgage servicers under which they will pause foreclosure proceedings for up to 30 days for a certain limited group of homeowners who contact them and provide updated financial information. In order to qualify for the Project Lifeline pause, a loan must (among other things) be 90-days delinquent and not have a foreclosure sale scheduled within 30 days. That means that there cannot be a sale scheduled within 120 days of the first missed payment. The problem is that many foreclosures are completed within this 120-window.

By the time a homeowner can qualify for Project Lifeline, there may be no home left to save. Are mortgage servicers this clueless about foreclosure law or is the point of Project Lifeline simply to sandbag other reform efforts?

Most servicers start foreclosure proceedings when mortgage loans are 60-days delinquent. The time it takes from the beginning of foreclosure proceedings to a sale varies significantly from state to state, but in many states, it can easily be completed within another 60 days. For example, in Maryland, my state of residence, it takes a minimum of 16 days. If I read Michigan law correctly, the sale can occur within 22 days. In Texas the foreclosure sale can be accomplished in 42 days. If servicers are efficient about foreclosures, there are many states (at least 17 and quite possibly more) in which no homeowners would be able to qualify for the Project Lifeline pause.

For those homeowners who do qualify for the pause, it’s worth noting that it is not a guaranteed 30-day pause, but a pause of up to 30 days, during which the servicer is not obliged to do anything. Assuming servicers attempt to work out the loan in good faith, we still shouldn’t be particularly optimistic about the outcomes given the past track record of mortgage servicers and the HOPE NOW Alliance. In the last half of 2007 some 869,000 workouts occurred. But 75% of those were repayment plans. Repayment plans just mean that arrearage is allowed to be paid out over time going forward. But there is no change to the terms of the mortgage. The monthly payments actually go up because in addition to the usual monthly payment, there is also the arrearage to be repaid. If the monthly payment was unaffordable before, a repayment plan actually makes things worse.

Even of the 25% of workouts that resulted in modifications of loan terms, we have no way of knowing whether these modifications were qualitatively sufficient to provide long-term solutions. Given the large number of mortgages in foreclosure from failed workouts (29% of foreclosures nationally!), it would appear that many were insufficient. It tells a lot about the HOPE NOW Alliance members’ mindset that they entitled their statistics on the number of mortgage modifications and repayment plans as “mortgage loss mitigation statistics.” (See pp. 12-16). Servicers are likely to lowball loan modification offers. As long as this happens, we are unlikely to see the mortgage industry fix the mess it wrought.

So let’s consider a few possibilities. If the mortgage industry’s efforts are unsuccessful, then we really need to have a fallback plan or else we’re looking at a foreclosure epidemic of unprecedented proportions. Permitting mortgage modification in bankruptcy would provide such a fallback.

On the other hand, if the industry's efforts are successful, then what harm is there in permitting modification of mortgages in bankruptcy? No one files a Chapter 13 petition for fun--that's 3 or 5 years of living on a court-supervised, IRS-devised budget. There simply is no moral hazard issue here.

Finally, permitting modification of mortgages in bankruptcy might actually facilitate the private work outs of delinquent mortgages because it would push servicers to offer modification terms closer to what a homeowner could get in bankruptcy. It’s hard to see what the possible downside is to permitting mortgage modification in bankruptcy—it would make bankruptcy treatment of mortgages like all other secured debts (at least pre-BAPCPA), would have little or no effect on interest rates, would not create moral hazard problems, and might facilitate private deal-making. We should see bankruptcy reform as a counterpart, rather than an alternative, to private mortgage loan workouts.

Comments

?Most servicers start foreclosure proceedings when mortgage loans are 60-days delinquent."

Adam, what's your source for this claim?

I understand that in most states a servicer can start foreclosures at 60 days down. But I am certainly not convinced, particularly right now, that servicers do start that early. I know of no state law that requires foreclosure to begin at the earliest point.

I have also seen a lot of servicer delinquency reports suggesting that there is a pretty large pipeline of loans that are in the 90+ delinquency category. A servicer who reports FC as a separate pipeline, and who also reports a 90+ deliquency pipeline, is saying that it has loans that are more than 60 days down but have not yet commenced foreclosure. Even among the loans reported as "FC," that simply means FC has commenced, not that it has been completed.

You write, "If servicers are efficient about foreclosures, there are many states (at least 17 and quite possibly more) in which no homeowners would be able to qualify for the Project Lifeline pause."

What reason do you have for thinking that servicers are "efficient" in the highest-FC states? What I'm hearing anecdotally as well as seeing in the reported data is that they're swamped.

I'm not defending Project Lifeline, which I think is just a PR stunt. Servicers have always stayed FC when and if they consider a workout; that's, um, what a workout is. If it lets seriously delinquent borrowers know that FC isn't necessarily inevitable, then possibly it will help. Otherwise it's just letting the public know what SOP is.

The fact is that any servicer can pause FC for any borrower at any delinquency level at any time it determines that the borrower is cooperating and a workout is possible. The Project Lifeline thingy doesn't change that or even limit it, as far as I can tell. It formalizes it for (possibly) some borrowers. That's all.

Tanta--there is no state law that requires foreclosures to start at 60 days. Servicers can start foreclosure at any point after delinquency, but are not required to foreclose at all. How servicers handle foreclosures varies by servicer and by the specifics of the loan. But my sense from interviews with people in the mortgage industry is that the foreclosure process is generally queued up to start at 60-days (by which I mean 2 missed payments, not rolling 30s). I don't know of any empirical data on this, however, and as you note, there are a good number of 90+ delinquent loans (although far fewer than 60+).

Your point about servicer efficiency is a fair one too, and will obviously vary by servicer. Servicers presumably have a duty to minimize lenders' losses (I'm thinking particularly if the servicer is an agent of the securitization trust), and that should mean moving fast to foreclose unless a workout is a better option.

But let's suppose that servicers are not moving as fast as they might. It isn't a lot of comfort to homeowners to say "this program might help you...but only if your servicer doesn't have its act together." In a large number of states, a distressed homeowner might manage to stumble into Project Lifeline qualification, but that would only be because (1) the servicer took its time starting your foreclosure because of a backlog, or (2) the servicer wasn't aggressive in scheduling an early sale date within the foreclosure process. Neither are things I would want to rely on if I were behind on a mortgage.

I agree with your assessment that all Project Lifeline does is (arguably) formalize (for a limited category of borrowers) servicers' pre-existing ability to pause foreclosures. If this is the best thing the Treasury and HUD can coax out of the mortgage industry, we're in real trouble.

Tanta, it's nice to see you getting out and about on the web these days. Careful those fuzzy bunny slippers don't get ruined...;)

Tanta has seen me say this multiple times over at Calculated Risk so I'll be brief here. Servicers are just as much the cause of the current crisis as any other element. Personally, I'm hoping that either Professor Porter or another entity expounds on her "Misbehavior and Mistake" work because a bigger picture really needs to be drawn with regard to mortgage servicing practices and the frequency in which "mistakes" happen. At some point, they simply can no longer be called "mistakes" and have to be categorized as "pattern and practice".

I was just made aware of a conversation that took place between two employees of different servicers. One was quoted as saying that they "made a killing" in Q4 '07 compared to Q4 '06. Something like 100%+ income. If the servicers are the only ones making significant profit in a mortgage market such as this the question of **WHY** needs to be asked and scrutinized from as many angles as possible.

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