It didn't make splashy headlines in the general press, but policy guidelines unveiled last week by Wall Street's biggest mortgage investors could help keep thousands of American home owners out of foreclosure during the upcoming year.
The policy affects hundreds of thousands of subprime mortgages heading for payment resets that have been pooled into multi-billion-dollar bond securities. During the housing boom years, most adjustable-rate “2/28” and “3/27” subprime home loans were shipped to Wall Street to be packaged into mortgage bonds, sliced and diced and aimed at global capital markets investors.
Many home buyers who obtained these once-popular mortgages now face steep payment increases that they may not be able to afford. With interest rates rising in the mortgage market overall, they may not have opportunities to refinance, and could find themselves stuck on tracks heading for loss of their homes.
For consumers in such financial jams, the mortgage industry's traditional remedy is to offer “loan modifications”-capped payments, longer repayment terms, rescheduling of reset dates, lower interest rates, forgiveness of a portion of the debt-designed to fit the borrower's specific needs.
But loans that have been pooled into securities and sold to investors worldwide often are enmeshed by rules and restrictions governing the range of changes that may be legally permissible. Some bond structures limit the number of loans inside the pool that can have their terms or payment requirements changed in any way. Others strictly limit the types of modifications that can be made. Federal tax and securities rules also restrain bond trustees from permitting wholesale modifications-however well intentioned-within the pool.
Last week the financial industry's primary trade group representing mortgage bond investors and sponsors, the American Securitization Forum, issued a set of principles and guidelines to members endorsing new flexibility in making loan modifications designed to keep homeowners out of foreclosure.
The guidelines came in response to a request earlier this spring from Senate banking committee chairman Sen. Chris Dodd (D-Conn.) for the industry to come up with voluntary solutions to the growing subprime delinquency and foreclosure problem-thereby making congressional intervention unnecessary.
Among the principles endorsed by the Forum, and saluted last week by FDIC chairman Sheila C. Bair, were:
- The importance of loan modifications as a means to both limit losses to investors as the result of foreclosures, but also as a way to assist consumers dealing with delinquencies.
- The importance of encouraging mortgage servicers, who work on the bond investors' behalf, to establish early contact with borrowers heading for trouble and to take action prior to default whenever possible.
- The need for amendments to existing securitization agreements that prohibit or restrict servicer flexibility to intervene with modifications, and
- The need to establish greater clarity and consistency in investor reporting about loan modifications.
The Forum also supported legal interpretations of existing bond contract language that could permit greater flexibility in addressing borrowers' problems with subprime loans.
As a practical matter, the Forum's recommendations, which are expected to be widely adopted by mortgage servicers and Wall Street, should stimulate larger numbers of home-saving loan modifications than would otherwise had been likely this year.
“The ASF recognizes,” said the policy statement, “that it is an important goal to minimize foreclosure and preserve homeownership wherever possible.”