Loan Modification - Obama Launches Mortgage Loan Modification Rescue Plan

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Source: NEW YORK (CNNMoney.com) -- The Obama administration's loan modification program is finally underway.

The Treasury Department announced Wednesday the first six participants to sign up for President Obama's plan. They include three of the nation's largest banks: JPMorgan Chase (JPM, Fortune 500), which will get up to $3.6 billion in subsidy and incentive payments; Wells Fargo (WFC, Fortune 500), $2.9 billion; and Citigroup (C, Fortune 500), $2 billion. The others are GMAC Mortgage, $633 million; Saxon Mortgage Services, $407 million; and Select Portfolio Servicing, $376 million.

Additional loan servicers will be added to the list over time, a Treasury spokesman said.

Several major servicers, including JPMorgan Chase and Wells Fargo, said they began modifying loans under the government initiative earlier this month. CitiMortgage signed up for the program on Monday and will start processing applications soon.

"We view this loan modification program as yet another incremental opportunity for thousands of homeowners to preserve and maintain the dream of homeownership," Wells Fargo said in a statement.

Distressed homeowners and housing counselors have been eagerly awaiting the program's launch since Obama first announced it on Feb. 18. However, it took weeks for the government to clarify the terms and for the financial institutions to update their systems and start accepting applications, frustrating many of those in trouble.

Billed as helping up to 9 million borrowers stay in their homes, the two-part plan calls for servicers to reduce monthly payments to no more than 31% of eligible borrowers' pre-tax income or to refinance eligible mortgages even if the homeowner has little or no equity. The government is allocating $75 billion to subsidize part of payment reduction, as well as provide thousands of dollars in incentives for servicers and borrowers to participate.

The Treasury Department said Wednesday it is capping the payments to servicers to allow more companies to participate. It is allocating $50 billion to the program, with Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and the Department of Housing and Urban Development providing the rest.

The modification plan calls for the servicer to reduce interest rates so that the monthly obligation is no more than 38% of a borrower's pre-tax income, and then the government would kick in money to bring payments down to 31% of income. Servicers can also reduce the loan balance to achieve these affordability levels. The government will share in the cost, up to the amount the servicer would have received if it had reduced the interest rates.

Only loans where the cost of the foreclosure would be higher than the cost of modification would qualify. Also, Treasury will not provide subsidies to reduce rates to levels below 2%.

It was not immediately clear whether the servicers must pay the incentives to homeowners and investors out of their funding share.

In addition to subsidizing the interest rates, servicers will use the Treasury funding to pay for incentives for themselves, homeowners and investors. The program gives servicers $1,000 for each modification and another $1,000 a year for three years if the borrower stays current. It will also give $500 to servicers and $1,500 to mortgage holders if they modify at-risk loans before the borrower falls behind.

Homeowners, meanwhile, will get up to $1,000 a year for five years if they keep up with payments. The funds will be used to reduce their loan principals.

The Treasury Department set the caps based on public data about the mortgages the servicers handle. Though the program mandates that servicers modify all loans that meet the requirements, the department feels the servicers will have sufficient funds to cover all troubled borrowers' applications.

"We're confident we'll have enough money," said Treasury spokesman Andrew Williams.

Separately, major servicers also recently started accepting applications under the refinance portion of the program.

Obama's Loan Modification Plan: 7 Things You Need to Know

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At the heart of the President Barack Obama's ambitious plan to rescue the housing market is the conviction that restructuring distressed mortgages will keep struggling borrowers in their homes and help insert a floor beneath plummeting property values. With $75 billion dedicated to reworking troubled loans, that's a big bet—especially considering that a top banking regulator said last December that almost 53 percent of loans modified in the first quarter of 2008 went bad again within six months. But supporters argue that mortgage modifications need to be properly engineered to work—and many early ones weren't. To that end, the Obama administration on Wednesday unveiled fresh details on its plan to restructure at-risk loans and help as many as four million home owners avoid foreclosure. Here are seven things you need to know about Obama's loan modification program.


1. Payments, not prices: The plan centers on the belief that struggling borrowers will stay in their homes—even as values decline sharply—as long as they can make their monthly payments. Although not everyone agrees with this, billionaire investor Warren Buffett endorsed the philosophy in his most recent letter to shareholders. "Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans)," Buffett wrote. "Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay."

2. Thirty-one percent: To that end, the administration's plan requires participating loan servicers to reduce monthly payments to no more than 38 percent of the borrower's gross monthly income. The government would then chip in to bring payments down further, to no more than 31 percent of the borrower's monthly income. In lowering the payment, the servicer would first reduce the interest rate to as low as 2 percent. If that's not enough to hit the 31 percent threshold, they would then extend the terms of the loan to up to 40 years. If that's still not enough, the servicer would forebear loan principal at no interest. The plan does not, however, require servicers to reduce mortgage principal, which Richard Green, the director of the Lusk Center for Real Estate at USC, considers a shortcoming. "For underwater loans, if you don't write down the balance to be less than the value of the house, people still have an incentive to default," Green says. "Writing down the principal first instead of last—which is what [the Obama administration is] proposing—makes sense to me."

3. Cash incentives: To encourage participation, servicers will be paid $1,000 for each modification and will get an additional $1,000 payout each year for as many as three years, as long as the borrower continues making payments. Borrowers, meanwhile, can get up to $1,000 knocked off the principal of their loan each year for as many as five years if they make their payments on time. Neither party can receive the cash incentives until the modified loan payments have been made for at least three months.

4. Financial hardship: The Obama administration is pitching its plan as an effort to help responsible homeowners ensnared in the historic housing slump and painful recession—not speculators. As such, only owner-occupied, primary residences with outstanding principal balances of up to $729,750 are eligible. Occupancy status will be verified through documents, such as the borrower's credit report. In addition, the program is designed to target homeowners who are undergoing "serious hardships"—such as a loss of income—which have put them at risk of default. To participate, borrowers will have to sign an affidavit of financial hardship and verify their income with documents. "If we would have had such stringent verification over the last four or five years, we probably wouldn't be in as bad a position as we are in," says Richard Moody, the chief economist at Mission Residential. But while Moody has no objection to such verification, obtaining documents from so many homeowners could be an onerous effort. "It's going to be a very time-consuming process," he says. Only loans originated on or before Jan. 1, 2009, are eligible, and modified payments will remain in place for five years. Now that the administration's plan is out, lenders are free to begin modifying loans.

5. Net present value: To determine if a particular mortgage will be modified, the servicer will perform a so-called net present value test. The test compares the expected cash flow that the loan would generate if it is modified with the expected cash flow it would generate if it isn't. If the modified loan is expected to produce more cash flow for the mortgage holder, the servicer is to restructure the loan. Howard Glaser, a mortgage industry consultant and a U.S. Department of Housing and Urban Development official during the Clinton administration, called this component of the plan "clever," arguing that it would work to ensure broad participation. "When you apply the formula, the loans that are modified are the ones that are in the best economic interest of the investors to modify," Glaser says. "The federal subsidy for the payment on the modification…tips the scale toward modification as a better deal for the investor."

6. Second liens: The Obama plan also addresses the issue of second liens—such as home equity loans or home equity lines of credit—by offering incentives to extinguish them. But key details on this component of the plan remained unclear. "Distinguishing the second lien is really important," Green says. "[But] exactly how they are going to convince the second lien holder to do this is not clear to me at all."

7. Will it work? Moody argues that while the plan may reduce foreclosures for primary residences, it could lead to a spike in defaults for another group of homeowners. Although he supports the administration's efforts to focus the initiative on primary residences, Moody notes that "it could be the case that a lot of [real estate speculators] have been just hanging on waiting to see exactly what the details are of this [plan]," Moody says. Now that it's clear the Obama plan leaves speculators out, "we could actually see a spike in foreclosures or at least mortgage defaults among this group."

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Lenders - Loan Modifications and Coming Cram Downs

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The debate over how to stop foreclosures rages on. The FDIC’s Sheila Bair is at the forefront of the crusade to modify mortgage loans to help stem foreclosures. There have even been reports that the regulator will be forced out of office because she has been fighting with other government entities to have loan modifications implemented more aggressively.

Bair doesn’t focus on the lenders, she just wants loans modified and says the government programs in place have not been effective. She’s been trying to push forward the FDIC model of dealing with failed IndyMac Bank’s loan portfolio as a prototype for all government efforts.

Tom Brown has been critical of Bair’s efforts to have loans modified and says the market must return to equilibrium without her economy-defeating ideas. He says loan modifications will only delay the inevitable cleaning out of the market. Besides, regulators reported recently that the majority of loans that have been modified often default anyway.

Lenders have been considered the bad guys, showing a lack of effort to modify loans. Bloomberg reports that many of the piggyback loans that were popular during the housing boom have been stymieing mortgage modification efforts—meaning that in many cases the lender simply couldn’t change such a complicated mortgage scheme. Or that when one part of a mortgage is modified, the other part of it may kill the whole thing anyway. Homebuilder Lennar shows on its Q408 conference call that it is often a simple matter of communication.

Traditional sellers, that is, homeowners and homebuilders, are not able to sell homes unless they offer even greater discounts and keep up with liquidation values. The movement to keep people in their homes and to rework defaulted loans is frankly frustrated, by the inability of banks and servicers to actually communicate with their borrowers, and reworked loans are defaulting at an alarming reported 50% to 60% rate in the first three to six months.

Offering lenders the option of modification, but not forcing them, is just one of the reasons numerous well-meaning government programs to stop defaults have failed. Efforts to force lenders to modify loans were stopped short when the $700 billion bailout bill passed in October. Now the movement to allow judges to modify loans is gaining ground again. This “cram-down” concept may yet take hold and then lenders will have no choice.

Modifying a Loan May Not Help

As lawmakers and housing advocates push the federal government to help cut the foreclosure rate, Comptroller of the Currency John Dugan offers this sobering statistic: More than half of loans modified in the first quarter of 2008 still fell delinquent within six months.

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As lawmakers and housing advocates push the federal government to help cut the foreclosure rate, Comptroller of the Currency John Dugan offers this sobering statistic:

More than half of loans modified in the first quarter of 2008 still fell delinquent within six months.

Dugan based his statement on data collected in a survey of institutions that service more than 60 percent of all first mortgages, or 35 million loans worth $6 trillion.

Experts say one possibility is that the modifications might not have lowered monthly payments enough to be truly affordable.

"The loan modifications I have seen demonstrate that the lenders are only agreeing to the smallest-possible changes that have provided only temporary relief for the borrowers," said Bruce Sattin, a lawyer in Lawrenceville, N.J., who handles foreclosure cases.

Sattin said most modifications required borrowers to continue their normal monthly payments and pay additional amounts each month to make up payments missed before the loan was altered.

"There are individuals for whom any loan modification would result in a mortgage payment they can't afford, because they couldn't really afford the original mortgage in the first place," said Farah Jiminez, executive director of Mt. Airy USA, a community-development corporation.

"Trying to save the homes of those in such arrangements may only be prolonging the pain — especially for the homeowner," she said.

RealtyTrac chief economist Rick Sharga has heard of instances where payments actually rose after modification.

"The loans need to be structurally changed in order for the problem to be resolved," Sharga said.

Ocwen Financial, a West Palm Beach, Fla., servicer of mainly subprime loans, took issue with Dugan's estimate, saying it has "kept 60,000 troubled mortgages performing and the borrowers in their homes" this year. Its data show just 24.5 percent of these loans were delinquent after six months.

A major roadblock to reducing the foreclosure rate is that homeowners had to be 60 to 90 days late on their mortgage before they were eligible for modification.

Fannie Mae recently announced, however, that it would permit loan modifications for struggling homeowners who pay mortgages on time.

"All prior government efforts to help homeowners have been completely flawed because they have forced homeowners to be 60 or 90 days late on their payments in order to qualify for relief," said Gibran Nicholas, of the CMPS Institute, which certifies mortgage bankers and brokers.

Nicholas said he believed that the high rate of delinquencies from modified loans was due to their not involving principal reductions, a point also made by other experts.

"Homeowners are still left with debt burdens that exceed the value of their homes," Nicholas said.

Sharga said he believed that real loan modifications could work, but that these require the lender — and the investors who bought the notes — to take a significant write-down in principal.

"But many loan services don't have the contractual right to lower the terms that dramatically, and many of the investors who hold the notes are reluctant to discount the assets that much," he said.

Loan Modification - Next $350 billion in rescue plan aren't available without loan modification

A key lawmaker on Friday said that Congress would be unlikely to approve any request from the Treasury for an additional $350 billion in bank bailout funds unless there was an agreement to have some of the money be used to modify mortgages.

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"If they were to seek $350 billion, there would be members of Congress that would insist on a vote and I don't think there is any way Congress would approve it without a resolution of the mortgage-modification issue," said Senate Banking Committee Chairman Christopher Dodd, D-Conn.

Treasury Secretary Henry Paulson has publicly opposed using money from the bank bailout fund to employ a proposal introduced by Federal Deposit Insurance Corp. Chairwoman Sheila Bair.

Dodd has joined many Democrats in Congress along with Bair in seeking $24.4 billion or more in bailout funds for a mortgage modification program that they believe would help avoid 1.5 million foreclosures.

Rep. Maxine Waters, D-Calif. on Thursday introduced legislation with eight co-sponsors including Rep. Carolyn Maloney, D-NY, that mirrors Bair's proposal.
So far, the Treasury Department has already committed $330 billion of the $700 billion bank bailout package.

Treasury has allocated $125 billion to buy minority stakes in nine large banks and another $25 billion to dozens of smaller banks. It has also committed another $100 billion to invest in additional financial institutions as well as a separate $20 billion infusion into Citigroup Inc.

Loan Modification Programs Ready To Go

You may have seen headlines about the latest public and private efforts to help financially distressed homeowners cope with their mortgage payments. But you might not have caught key details that could have personal impact on you or people you know - now or in the recession months ahead.

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One of the most ambitious mass-market “loan modification” programs was outlined Nov. 11 by the Federal Housing Finance Agency - overseer of Fannie Mae and Freddie Mac.

The program, which is set to start Dec. 15, aims to help homeowners who are three months or more behind on mortgage bills.

Borrowers can qualify for sharply reduced interest rates, deferred principal payments, extended loan terms - whatever it takes to make their mortgages affordable.

However, homeowners must show that a hardship made them fall behind on their loans.

Borrowers must also prove that they didn’t intentionally go into default just to get better loan terms.

Lastly, participants must document that they can handle mortgage payments of up to 38 percent of monthly gross income.

Participating lenders say they want to hear as early as possible from homeowners interested in the new program.

Borrowers can work through the Hope Now Alliance (HopeNow.com) or the U.S. Department of Housing and Urban Development (HUD.gov/foreclosure). Hope Now also has its own toll-free hotline (888-995-HOPE).

The same day that FHFA unveiled its mass loan modifications effort, Citicorp - one of the nation’s largest mortgage lenders - unveiled a separate program designed to proactively help at-risk homeowners.

Citicorp plans to reach out to an estimated 500,000 mortgage customers who aren’t currently delinquent, but who appear to be at risk.

These clients either have credit files that show telltale signs of financial stress, or own homes located in markets that Citicorp thinks will face serious economic strains soon.

The bank plans to offer some $20 billion in “pre-emptive” mortgage modifications to such customers, handing out rate cuts, loan-term extensions and even - a rarity in the banking world - principal reductions.

Citicorp also intends to halt foreclosure actions against any homeowner who works in good faith with the bank and has sufficient income to handle modified monthly mortgage payments.

Both the FHFA and Citicorp programs make use of a “mass-market” loan-modification approach championed by FDIC Chairman Sheila Bair.

Bair made headlines in recent months when the Federal Deposit Insurance Corp. - the government agency that takes over failing banks - offered consumers across-the-board help to avoid foreclosures.

After the FDIC seized IndyMac earlier this year, the agency unilaterally offered many of the institutions’ delinquent mortgage customers loans with 3 percent interest rates.

Most experts believe that only such wholesale approaches can prevent a continued wave of mass foreclosures.

However, not everyone agrees with the latest proposals on mass loan modifications.

For instance, some experts criticize the fact that the FHFA plan requires homeowners to be three months behind on mortgage payments to qualify.

“All I have to do is stop making mortgage payments and I can get a 3 percent rate? Sweet!” asked Rob Chrisman of California-based Residential Pacific Mortgage.

Other critics argue that mass modifications will produce high rates of “recidivism” - scads of future foreclosures as homeowners find they can’t afford even new, cheaper loans.

“If you’re doing mass loan modifications without careful, individual re-underwriting, you’re just going to end up having to do the same thing again (in a few years),” said Joseph Smith of Kentucky-based Default Mitigation Management LLC.

FDIC's Chairman Sheila Bair Defends Community Reinvestment, Supports Loan Modification

FDIC chairman Sheila Bair said the U.S. government has been behind the curve when it comes to preventing foreclosures, and called for regulators to use their authority in creating flexible rules for making free loan modifications a top priority.

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She also defended the Community Reinvestment Act, a program that critics say was instrumental in creating the subprime crisis.

"I'm fully aware that the subprime debacle has shaken confidence in our ability to protect consumers. This is why bank regulators need to be smarter in using all of our supervisory tools to nip harmful practices in the bud, before they take on the scope and scale we've witnessed with the subprime debacle," she said in prepared remarks before the Consumer Federation of America on Thursday.

Bair said regulators need fast-track, broader-based efforts to help homeowners stay in their homes. She also reiterated that the IndyMac program developed by the FDIC could be a model for such efforts.

Under the plan, people who took out fixed-rate mortgages from IndyMac Federal would be able to seek lower priced loans if they were in, or near, default. The FDIC authorized IndyMac to modify loans that were 60 days or more delinquent, allowing monthly payments to be reduced to a level no greater than 38% of monthly household income.

Bair, a Republican, has said before that the IndyMac protocol could become a template for a nationwide program that she estimates would cost $24 billion. The idea has received broad support from House Democrats, but Treasury Secretary Henry Paulson has been reluctant to support the idea with TARP funds, and others aren't convinced the program would cost so little.