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Of The 650,994 Home Loan Modifications Started Through Obama Administration’s Home Affordable Modification Program, How Many Have Become Permanent? Why?

If Multifamily Investor is even asking the question, then you know the number has to be very low. How low?

A) Zero
B) One
C) Two
D) One Percent

The answer is A, Zero!

Why?

1. Interest modifications may not be enough to make a difference for a homeowner.
2. Negative equity may be too much of a disincentive to pour any additional money into a home.
3. Banks make more fees by foreclosing than by making loan modifications permanent. In case of foreclosures, they also recover a piece of their otherwise vanishing second mortgage positions.

Wilbur Ross, of all people, is a vocal proponent of deep residential loan modifications. He owns Irving, Tex.-based American Home Mortgage Servicing, Inc., which recently became the nation’s largest third-party servicer with the acquisition of a large portfolio from Citigroup Inc.

[Ross] said that his American Home servicing shop has seen six-month recidivism rates below 20 percent — compared to the 50 or 60 percent standard in the industry — because the servicer has been aggressively looking to cut principal balances.

“The price of housing needs to be cleaned out. The Obama administration could right-size every underwater home and reduce principal to fit the current market value of the home. If they are going to deal with it they have to deal with it in a severe way,” Ross [said]. “They also really need to consider all borrowers who are underwater, and not just the ones that have gone into default…Why should a guy who’s not paying benefit, while some poor citizen who’s struggling to make the payments gets stuck with the mortgage?”

His own plan looks something like this:
1. The lender takes a write-down in principal, and the servicer takes a similar hit on any servicing strip on the newly-reduced UPB.
2. After principal reduction, the government guarantees half of the remaining principal the lender now holds.
3. This guarantee of half the principal can now be sold into the securitization market, which will give the lender an income stream on the home again and offset some of the losses the owner of the loan has to take when they write down the principal.
4. When the house is sold, if the value of the home has gone up at the point of sale, the homeowner and the lender share in the profits earned on the gain.

Hat Tip: Naked Capitalism

As blogger Naked Capitalism pointed out,

[Regarding arguments for the] sanctity of contract, the father of mortgage backed securities, Lew Ranieri, seemed genuinely shocked in the Milken conference in 2008 when other participants said mods were restricted or prohibited in many securitization contracts. Ranieri said they did them routinely. Not only has the industry done anything more than go through the motions, one has to wonder whether they influenced Treasury in the design of the program so as to assure it would not be effective.

Multifamily Investor has proposed interest-only loan modifications across the board for homeowners, direct from Uncle Sam, at one and two percent interest. Such a suggestion, may well be less Catholic than the Pope. If the folks with real “skin in the game” are advocating such radical steps to stop the hemorrhaging, perhaps we need to reconsider our once seemingly radical position.

Related posts:

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3. How Many U.S. Multifamily Loans Are In “Special Service?” Master servicers hand off loans to “special servicers” when...
4. How Much Money Extinguishes Homeowners’ Negative Equity? Nearly 10.7 million borrowers, or 23% of the residential...
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