BILL ANALYSIS
SB 7 X2
Page 1
( Without Reference to File )
SENATE THIRD READING
SB 7 X2 (Corbett)
As Amended February 14, 2009
Majority vote
SENATE VOTE : Vote not relevant
SUMMARY : Provides that a servicer of residential mortgage loans
may not proceed with foreclosure proceedings for 90 days under
specified conditions, unless the servicer has a comprehensive
loan modification program. Specifically, this bill :
1)Makes legislative findings and declarations relating to the
foreclosure crisis.
2)Specifies that a mortgage, trustee, or other person authorized
to take sale shall not give notice of sale until for an
additional 90-days in order to allow parties to pursue a loan
modification to prevent foreclosure, if the following
conditions exist:
a) The loan was recorded between January 1, 2003 to January
1, 2008;
b) The loan is the first mortgage or deed of trust;
c) The borrower occupies the property as their principal
residence when the loan becomes delinquent; and,
d) The Notice of Default (NOD) has been recorded on the
property.
3)Provides that the additional 90-day foreclosure delay does not
apply to the following:
a) Loans serviced by a mortgage loan servicer that has
obtained an order from the Department of Corporations
(DOC), Department of Real Estate (DRE), or Department of
Financial Institutions (DFI) exempting it from the 90-day
foreclosure delay by providing evidence that the servicer
has a comprehensive loan modification program;
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b) Loan serviced by a mortgage loan servicer that has
applied for an exemption, but the final decision has not
been rendered;
c) Loans made, purchased, or serviced by a California state
or local public housing agency or authority; or,
d) Loans that are collateral for securities purchased by a
California state or local public hosing agency or
authority.
4)The foreclosure delay shall not apply if any of the following
occurs:
a) The borrower has surrendered the property, as evidenced
by either a letter confirming the surrender or delivery of
the keys to the property to the mortgagee, trustee,
beneficiary, or authorized agent;
b) The borrower has contracted with an organization,
person, or entity whose primary business is advising people
who have decided to leave their homes regarding how to
extend the foreclosure process and avoid their contractual
obligations to mortgagees or beneficiaries; or,
c) The borrower has filed for bankruptcy, and the
proceedings have not been finalized.
5)Provides that a mortgage loan servicer may be exempt from the
90-day foreclosure delay on loans it services if it has
received an exemption based on having a comprehensive loan
modification program consisting of the following features:
a) The loan modification program is intended to keep
borrowers whose principal residences are homes located in
California in those homes when the anticipated recovery
under the loan modification or workout plan exceeds the
anticipated recovery through foreclosure on a net present
value basis;
b) The loan modification program targets a ratio of the
borrower's housing-related debt to the borrower's gross
income of 38 percent or less, on an aggregate basis within
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the program; and,
c) The loan modification program includes some combination
of the following features:
i) An interest rate reduction, as needed, for a fixed
term of at least five years;
ii) An extension of the amortization period for the loan
term to no more than 40 years from the original date of
the loan;
iii) Deferral of some portion of the principal amount of
the unpaid principal balance until maturity of the loan;
iv) Reduction of principal;
v) Compliance with a federally mandated loan
modification program;
vi) Other factors that the commissioner (see 19) below
for any references to commissioner) determines are
appropriate. In determining those factors, the
commissioner may consider efforts implemented in other
jurisdictions that have resulted in a reduction in
foreclosures; and,
vii) Results in long-term sustainability for the
borrower.
6)Specifies that the application for exemption shall be in the
form and manner determined by the commissioner.
7)Requires the commissioner to notify applicants of the date of
receipt of an initial exemption application and requires the
commissioner to issue a temporary order exempting the mortgage
loan servicer from the foreclosure delay. The temporary order
shall remain in effect until a final order has been issued by
the commissioner.
8)Provides that within 30 days of receipt of an application, the
commissioner shall make a final determination on whether the
application meets the criteria of a comprehensive loan
modification program.
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9)Specifies that a mortgage loan servicer may resubmit its loan
modification program to the commissioner if its application
for exemption is denied.
10)Provides authority to the commissioner to revoke, upon
reasonable notice and an opportunity to be heard, an exemption
granted to a mortgage loan servicer if the servicer has
submitted a materially false or misleading application or if
the approved loan modification program has been materially
altered from the loan modification program on which the
exemption was based.
11)Specifies that revocation by the commissioner shall not be
retroactive.
12)Mandates that the commissioner shall adopt emergency and
final regulations, as necessary, to clarify the application of
this legislation, including the creation of the application
for servicers and requirements regarding the reporting of loan
modification data by mortgage loan servicers.
13)Specifies that three months after the first exemption is
issued the Secretary of the Business, Transportation and
Housing Agency (Secretary) shall submit a report to the
Legislature regarding the details of the actions taken to
implement this legislation and the numbers of applications
received and orders issued. The Secretary shall submit an
additional report six months from the date of the submission
of the first report and every six months thereafter.
14)Requires, that within existing resources, the commissioners
shall collect, from some or all mortgage loan servicers, data
regarding loan modifications accomplished pursuant to this
section and shall make the data available on an Internet Web
site at least quarterly.
15)Mandates that the Secretary shall maintain on an Internet Web
site a publicly available list disclosing the exemptions
granted, the date of each exemption and a link to a Web site
describing the program.
16)Allows, until January 1, 2010, the commissioner is authorized
to contract for goods and services necessary to implement
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these provisions, and any such contract shall be exempt from
Chapter 2 [commencing with Section 10290] of Part 2 of
Division 2 of the Public Contract Code. Not less than 30 days
prior to awarding any contract, the commissioner shall provide
the pending contract documents to the Joint Legislative Budget
Committee.
17)Provides that any person who violates any provision of this
legislation shall be deemed to have violated his or her
license law as it relates to these provisions.
18)Provides that the nothing shall require a servicer to violate
contractual agreements for investor-owned loans or provide a
modification to a borrower who is not willing or able to pay
under the modification.
19) Defines "Commissioner" as any of the following:
a) The Commissioner of DOC for licensed residential
mortgage lenders and servicers and licensed finance lenders
and brokers servicing mortgage loans and any other entities
servicing mortgage loans that are not described in
subparagraph (b) or (c);
b) The Commissioner of DFI for commercial and industrial
banks and savings associations and credit unions organized
in this state servicing mortgage loans; or,
c) The Commissioner of DRE for licensed real estate brokers
servicing mortgage loans.
20)Defines "Housing-related debt" as debt that includes loan
principal, interest, property taxes, hazard insurance, flood
insurance, mortgage insurance, and homeowner association fees.
21)Defines "Mortgage loan servicer" as a person or entity that
receives or has the right to receive installment payments of
principal, interest, or other amounts placed in escrow,
pursuant to the terms of a mortgage loan or deed of trust, and
performs services relating to that receipt or enforcement as
the holder of the note or on behalf of the holder of the note
evidencing that loan.
22)Provides for a sunset date of January 1, 2011.
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EXISTING LAW :
1)Regulates the non-judicial foreclosure process pursuant to the
power of sale contained within a mortgage contract, and
provides that in order to commence the process, a trustee,
mortgagee, or beneficiary must record a NOD and allow three
months to lapse before setting a date for sale of the
property. [Civil Code Section 2924, all further references are
to the Civil Code].
2)Further provides that the mortgagee, trustee or other person
authorized to make the sale must give notice of sale, and
requires notice of the sale to be made, as specified, at least
20 days prior to the date of sale. [Section 2924f].
3)Provides that a mortgage, trustee, beneficiary, or authorized
agent (entities) may not file a NOD until 30 days after
contact has been made with the borrower who is in default.
[Section 2923.5a1].
4)Requires entities to contact a borrower in default in person
or by telephone and inform them of their right to a subsequent
meeting, and telephone number of the United States Department
of Housing and Urban Development (HUD) to find a HUD certified
housing counselor. [Section 2923.5a2].
5)Allows a borrower to assign a HUD-certified counselor,
attorney or other advisor to discuss with the entities options
for the borrower to avoid foreclosure. [Section 2923f].
6)Provides that a NOD may be filed when an entity has not
contacted the borrower provided that the failure to contact
the borrower occurred despite reasonable due diligence on the
part of the entity and that "due diligence" means and requires
the following:
a) The entity sends a first class letter that includes the
toll-free number available for the borrower to find a
HUD-certified housing counseling agency; and,
b) Subsequent to the sending of the letter the entity
attempts to contact the borrower by telephone at least
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three times at different hours and on different days.
[Section 2923g].
7)Requires an entity to maintain a toll-free number for
borrowers that will provide access to a live representative
during business hours and requires the entity to maintain a
link on the main page of its Internet Web site containing the
following information:
a) Options that may be available to borrowers who are
unable to afford their mortgage payments and who wish to
avoid foreclose, and instructions to borrowers advising
them on steps to take to explore these options; and,
b) A list of documents borrowers should collect and be
prepared to submit when discussing options to avoid
foreclosure. [Section 2923g (5)].
8)Specifies that the notice and contact requirements do not
apply in the following circumstances:
a) The borrower has surrendered the property as evidenced
via a letter or delivery of keys to the property to the
entity;
b) The borrower has contacted a person or organization
whose primary business is advising people who have decided
to leave their homes on how to extend the foreclosure
process and avoid the contractual obligations; or,
c) The borrower has filed for bankruptcy. [Section 2923h].
9)The requirements in point's #3-8 above only apply to loans
made from January 1, 2003 to December 31, 2007.
10)The requirements in point's #3-8 above sunset, January 1,
2013.
11)Makes a legislative finding and declaration that a loan
servicer acts in the best interests of all parties if it
agrees to, or implements a loan modification or workout plan
in one of the following circumstances:
a) The loan is in payment default, or payment default is
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reasonably foreseeable; or,
b) Anticipated recovery under the loan modification or
workout plan exceeds the anticipated recovery through
foreclosure on net present value basis. [Section 2923.6].
12)Requires that upon posting of a notice of sale, an entity
shall mail to the borrower a notice in English and Spanish,
Chinese, Tagalog, Vietnamese, or Korean that states:
"Foreclosure process has begun on this property, which may
affect your right to continue to live in this property. Twenty
days or more after the date of this notice, this property may
be sold at foreclosure. If you are renting this property, the
new property owner may either give you a new lease or rental
agreement or provide you with a 60-day eviction notice.
However, other laws may prohibit an eviction in this
circumstance or provide you with a longer notice before
eviction. You may wish to contact a lawyer or your local legal
aid or housing counseling agency to discuss any rights you may
have." [Section 2924.8].
FISCAL EFFECT : Unknown
COMMENTS :
The Assembly Banking and Finance Committee has conducted several
hearings over the last 18 months reviewing the implications and
impacts, of what may be the largest financial crisis in recent
history. In spite of the best efforts of regulators, financial
institutions and consumer organizations, foreclosures still
occur at record numbers.
Recently, the net amount of foreclosure activity has decreased,
though the numbers are still well above historic averages. On
February 12, 2009, ForeclosureRadar reported that in January
2009
Notices of Default, Notices of Trustee Sale, and sales at
auction, decreased not only from the prior month, but year over
year as well. According to this report, these decreases could
be attributed to the significant changes taking place among
financial institutions. Wells Fargo, with its recent acquisition
of Wachovia, saw a drop in Notice of Default filings of 46
percent, while JP Morgan, which acquired Washington Mutual, saw
a drop of 49 percent. Bank of America, which earlier acquired
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Countrywide, saw a significant 281 percent increase in filings,
though still below the levels Countrywide experienced in the
second quarter of 2008.
California had the second-highest state foreclosure rate last
month, with 1 in every 173 housing units receiving a filing.
Nevada foreclosure activity led the nation with 1 in 76 housing
units receiving a foreclosure filing.
Six of the top 10 metro areas with the highest foreclosure rates
in January were in California. Merced led the nation with 1 in
59 housing units receiving a filing -- nearly eight times the
national average.
Other California metros in the top 10: Riverside-San Bernardino
at No. 4, 1 in 81 housing units; Modesto at No. 5, 1 in every 84
units; Stockton at No. 6, 1 in every 86 units; Vallejo-Fairfield
at No. 7, 1 in every 100 units; and, Bakersfield at No. 8, 1 in
every 120 houses.
According to online housing price data provider Zillow.com, the
housing market lost an estimated $3.3 trillion in value last
year and almost one in six owners owed more than their homes
were worth.
California foreclosure process
A discussion of the foreclosure process under California law
must take place under a consideration of the recent enactment of
SB 1137. The provisions of SB 1137 effectively implement a
30-day delay on the current foreclosure process. Under
California law, the statutory timeline from NOD filing to
foreclosure sale is 116 days. So with the implementation of SB
1137 borrowers have a statutory timeline of 146 days from
delinquency to foreclosure sale. What does this mean in
comparison of what other states may be doing? Maine, which has
a judicial foreclosure process, has the longest timelines for
the foreclosure process. Under Maine's law it can take 209 days
to complete the process. Tennessee has the shortest time-frame
under a statutory foreclosure process that only last 33 days.
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The national average for all 50 states is 120 days.
However, the aforementioned numbers are the statutory deadlines.
Other factors have a greater influence on the actual time it
takes to complete a foreclosure proceeding. Issues from mailing
time, to the date that borrowers are actually in default can
have a significant impact on length of the process.
Freddie Mac conducted a study, Interventions in Mortgage
Default: Policies and Practices to Prevent Home Loss and Lower
Costs, March 2008 (Cutts and. Merrill) that examined, among
other things, the foreclosure timelines of various states
compared with actual "real-world" performance. First the time
at which borrower is officially in default is a significant
factor as to when the process starts. Freddie Mac, as an
investor, determines that a borrower is "30-days" late measured
as 60 days after the due date of the last paid installment. The
Mortgage Bankers Association considers delinquency as being 60
days late as well. Freddie Mac estimates that the actual
foreclosure process time is 266 days for loans in their pools.
Committee staff has conducted a more conservative analysis,
taking into account the requirements of SB 1137, and estimates
that foreclosure process time from NOD to sale is around 150 to
180 days.
Loan modification efforts.
DOC data collection & standardization of workout process.
In September of 2007, the commissioner of DOC designed a
voluntary survey to query the loan modification efforts of loan
servicers. DFI also engaged in a survey of state chartered
banks and credit unions. Subsequent to this survey effort,
Governor Schwarzenegger and DOC commissioner DuFauchard
announced an agreement with five of the largest loan servicers
to streamline the modification process. The agreement was
reached with four lenders representing 25 percent of the
sub-prime loan market in California with the agreement
consisting of three basic principles providing that mortgage
lenders will:
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Reach out proactively to borrowers well before their
loans reset;
Streamline the processes by which they determine whether
borrowers may reasonably be expected to be able to make the
reset payment; and
For people who are in their homes and making timely
payments now at the starter rate, but who lenders determine
cannot make the reset payment, keep them at that starter
rate for a sustainable period of time.
Additionally, DOC continued to collect data from their licensees
who service mortgage loans to determine the pace and scope of
loan modification efforts. DOC has collected and reported this
data on a monthly basis with the commissioner pledging to
collect this data for a long as necessary. Additional
observations made by the commissioner, together with survey
data, are available on the department's Web site, at
http://www.corp.ca.gov/ .
The latest DOC data release, issued on October 29, 2008,
covering the third quarter of 2008, found that modifications
increased among their servicers from the first quarter to the
third quarter by 84.9 percent.
In order to solidify the authority of DOC to collect this data,
the legislature passed and the Governor signed, AB 69 (Lieu)
Chapter 277, Statues of 2008. AB 69 provided DOC with explicit
authority to collect data from its licensees on loan
modifications.
American Securitization Forum Standardization
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In early December 2007, Treasury Secretary Henry Paulson
announced an agreement to streamline and establish standards for
loan modification and in some cases freezing the interest rate
on some loans for five years. This agreement
( http://www.americansecuritization.com/uploadedFiles/FinalASFStat
ementonStreamlinedServicingProcedures.pdf ) was reached in
conjunction with the American Securitization Forum (ASF), an
organization that represents companies that issue mortgage
backed securities, as well as investors, loan servicers and
rating agencies. The ASF modification parameters sorts subprime
borrowers whose rates are about to reset into three categories:
1)Those who are current on their loans, have decent credit
scores and equity in their homes, and are likely to be
eligible for refinancing. The plan "encourages" servicers to
refinance these loans without prepayment penalties, but there
are no guarantees.
2)Those who are current on their loans but are not eligible to
refinance because of poor credit scores or zero to 3 percent
equity in their homes. This is the group that could be
fast-tracked into a five-year freeze at the loan's
introductory rate, to prevent their monthly payments from
shooting up.
3)Those who are delinquent on their loans even at the
introductory rate and do not qualify for refinancing. This
group could very well end up in foreclosure or have to "short
sell" their home if no other option can be worked out.
The ASF plan also called for voluntary data collection by its
members on loan modifications and workout arrangements.
Foreclosure Prevention Working Group
In February 2008, the State Foreclosure Prevention Working Group
(SFPWG) released its first of two reports, summarizing data
collected by a working group comprised of the Conference of
State Bank Supervisors and representatives of the Attorneys
General of 11 states, including California. The SFPWG's first
report summarized data provided by 13 servicers, representing
approximately 58 percent of the subprime servicing market, for
the month of October 2007. Its second report, released in April
2008, included data from the same servicers, for loans made from
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October 2007 through January 2008.
SFPWG released their third report for September 2008 composed of
data collected from 13 servicers representing 57 percent of the
subprime market. Based on that report, SFPWG concluded the
following:
1)Nearly eight out of ten seriously delinquent homeowners are
not on track for any loss mitigation outcome. In prior
reports, seven out of ten homeowners were not on track for any
loss mitigation outcome. This means that 40,000 fewer loans in
loss mitigation in May 2008 than in January 2008.
2)New efforts to prevent foreclosures are on the decline,
despite a temporary increase in loan modifications through the
2nd Quarter of 2008. The number of homeowners working toward
a loan modification has declined by 28 percent between January
and May, falling to a level not seen since late in 2007. This
decline stands in stark contrast to the 51 percent increase in
loan modifications closed over this same period. In January,
modifications in process outnumbered short sales in process by
four to one; in May, that ratio had dropped to two to one.
3)One out of five loan modifications made in the past year are
currently delinquent. The high number of previously-modified
loans currently delinquent indicates that significant numbers
of modifications offered to homeowners have not been
sustainable. Recent reports identify that many loan
modifications are not providing any monthly payment relief to
struggling homeowners. While banks and Wall Street firms
continue to report record write-downs of mortgage loan
portfolios and securities, these losses do not appear to be
flowing down to homeowners in the form of sustainable loan
modifications. We are concerned that unrealistic or "band-aid"
modifications have only exacerbated and prolonged the current
foreclosure crisis.
4)Three hundred thousand subprime loans are in the process of
foreclosure as of the end of May 2008. Thirty-eight percent
(38%) of seriously delinquent subprime loans are in the
process of foreclosure, with over 131,000 foreclosures
completed on subprime loans in May 2008 alone. Delinquency
and foreclosure rates remain high and have a ripple effect
through housing, mortgage, and financial markets.
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The SFPWG's reports can be found at:
http://www.csbs.org/Content/NavigationMenu/Home/StForeclosure
Main.htm .
The Office of Comptroller of Currency (OCC) and Office of Thrift
Supervision (OTS) produced a report on December of 2008, OCC and
OTS Mortgage Metrics Report. This report found that 55 percent
of loan modifications made by national banks and federal thrifts
were 30+ days delinquent six months after the modification. One
potential reason for this large default rate is that the loan
modifications did not reduce monthly payments enough to be
affordable. The SFPWG has expressed concern that they data the
working group has collected from non-bank loan servicers the
re-default rates are not as severe. On February 2, 2009, the
group sent a letter to the directors of OCC and OTS asking for
increased transparency regarding the metrics reports provided by
OCC and OTS. Specifically, the SFPWG's expressed the following:
We are concerned that either the institutions supervised by
the OCC and OTS have thus
far failed to offer homeowners sustainable loan
modifications, in contravention to guidance issued by the
federal banking agencies, or that the data collection has some
other limitation not identifiable by your current report.
As a result, we ask that you provide to the public a full
and transparent report of loan
modifications made by national banks and federal thrifts?
Accurate and informative data is critical to the policy
process, and the OCC and OTS are
uniquely positioned to assist given (1) the sizeable market
share held by the servicers
within your jurisdiction and (2) the access to loan level data
that you possess as the
regulators of these institutions. Without a more transparent and
robust reporting, we are
concerned that the statistics publicized by the OCC/OTS Report
are misleading and likely to
lead policymakers and the public to develop misperceptions about
the effectiveness of loan
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modification programs. Over our 17 months of working with
mortgage servicers, we have
developed the firm view that we have done far too little to
modify unaffordable
loans, not too much. The failure to act sooner and more
aggressively has perpetuated
downward trends in real estate markets across the country, as
the failure to prevent
foreclosures has depressed property values and increased the
likelihood of additional
foreclosures.
HOPE NOW Alliance
On August 31, 2007, President George W. Bush asked Housing and
Urban Development Secretary Alphonso Jackson and Treasury
Secretary Henry Paulson to work with mortgage lenders,
foreclosure counselors, the Federal Housing Administration,
Fannie Mae and Freddie Mac to launch a new "foreclosure
avoidance initiative". These discussions led to the creation of
the Hope Now alliance, which was announced by Secretary Paulson
on October 10, 2007.
At its inception HOPE NOW was comprised of lenders representing
60 percent of all outstanding mortgages in the United States,
counseling services, trade organizations and a group
representing investors in mortgage backed securities .
Additional organizations joined over the following months.
To date, it has released state-specific and national data on
foreclosure starts, foreclosure sales completed, repayment plans
established, loan modifications completed, and repayment plan
inventory for all four quarters of 2007 and the first two
quarters of 2008.
HOPE Now released their latest data for September 2008. Their
report reveals the following:
1)In September of 2008 the number of foreclosures prevented in
one month exceeded 200,000. It is also 30,000 (15.6 percent)
more than the previous record of 192,000 foreclosure
preventions set in August 2008.
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2)In September, mortgage servicers helped homeowners avoid
foreclosure by completing 212,000 mortgage workouts, which
include both modifications to the terms of existing mortgages
and repayment plans.
3)Approximately 1.6 million homeowners had been able to avoid
foreclosure so far this year. This is more than the
approximately 1.5 million homeowners the industry helped in
all of 2007. If the current trend continues, in 2008 the
mortgage lending industry will help approximately 2.1 million
homeowners stay in their homes and avoid foreclosure, an
almost 40 percent increase over the number of homeowners
helped in 2007.
4)September modifications were 22.5 percent higher than the
79,000 completed in August 2008.
5)Total repayment plans initiated in September were 113,000 --
3,000 more than the number initiated in August.
6)Since July 2007, mortgage servicers helped 2.47 million
homeowners avoid foreclosure.
7)In September, approximately 113,000 homeowners received
repayment plans; approximately 98,000 received loan
modifications.
8)Nearly 59 percent of homeowners with subprime loans who
received workouts through mortgage servicers received
modifications.
HOPE NOW today also announced the results of a separate survey
of subprime adjustable rate mortgages with rates resetting in
2008. The results, reported by 9 companies representing
approximately 60 percent of subprime loans, are as follows:
1)Rates on approximately 1.4 million subprime loans were
scheduled to reset between January and September 2008.
2)Since rates began to reset on these loans in January 2008,
those loans that were current at reset and subsequently
started the foreclosure process account for 1.3 percent of
remaining loans.
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3)Nearly 111,000 of the 1.4 million loans have been modified.
Over 73 percent of these modifications are for 5 years or
longer.
4)Almost 524,000 of the subprime adjustable rate loans that were
originally scheduled to reset during this period were paid in
full when the homeowner refinanced the loan or sold the
property.
Committee staff acknowledges that the efforts of HOPE NOW are
often a subject of disagreement with consumer advocates. The
committee did not conduct an independent analysis of the HOPE
NOW data, other than to point out that the use of repayment
plans as modification tools, depending on structure and
amortization schedule, often run a greater risk of re-default
than actual modification of interest rate and loan terms.
SB 1137
As referenced earlier in this analysis, the Legislature passed
and the Governor signed SB 1137 that imposed requirements on
servicers to encourage contact and loan modifications between
servicers and borrowers. SB 1137 requires a mortgagee,
beneficiary or authorized agent (hereinafter "mortgagee") to
contact or attempt to contact a borrower, in person or by phone,
at least 30 days prior to the filing of a default notice.
During the initial contact the mortgagee must:
1)Assess the borrower's financial situation and explore options
for the borrower to avoid foreclosure, or inform the borrower
that he or she has the right to request a second meeting to do
so.
2)Schedule a second meeting within 14 days, if requested.
3)Provide the borrower with a toll-fee number for HUD-certified
counseling agencies.
For purposes of the meeting, the following requirements are
applicable:
1)The meeting may occur by telephone.
2)The participants may include a mortgagee's loss mitigation
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staff as well as a mortgagor, trustor, or a designated housing
counselor, attorney or other advisor.
3)A borrower may designate a HUD-certified housing counseling
agency, attorney, or other advisor to discuss with the
mortgagee, on the borrower's behalf, options for the borrower
to avoid foreclosure.
4)Any such contact made at the direction of the borrower would
satisfy the contact requirement.
5)The borrower must approve any modification or workout plan
offered at the meeting.
A NOD may be filed without making contact with a borrower if a
mortgagee used due diligence to contact the borrower, which
requires that the mortgagee do the following:
1)Send a first-class letter that includes a HUD toll-free
telephone number.
2)Attempt to contact a borrower by phone at least three times at
different hours and on different days, using the primary
number on file, and send a certified letter with return
receipt requested, if there is no reply to the calls within
two weeks.
3)Provide the borrower with a means to contact the mortgagee in
a timely manner, including a toll-free number that will
provide access to a live representative during business hours.
4)Post a prominent link on the homepage of the mortgagee's
website that includes:
a) A list of options that borrowers can use to help avoid
foreclosure and instructions on how to review them;
b) A list of financial documents that the borrower should
be prepared to present to the mortgagee when discussing
options to foreclosure;
c) A toll-free number for the borrower to use to discuss
options with the mortgagee; and,
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d) A toll-free number to locate HUD-certified counseling
agencies.
The contact requirements do not apply if the borrower
surrendered the property by submitting a letter or the keys to
the mortgagee, contracted with an entity to avoid his or her
contractual obligations as a mortgagee, or filed for bankruptcy,
where the proceedings are not final.
SB 1137 requires a mortgagee to file a declaration of contact
with the borrower (Operative 60 days after July 8, 2008) prior
to the filing a NOD, a mortgagee must include a declaration
regarding contact with a borrower in a default filing, that
indicates the mortgagee has contacted the borrower, attempted
with due diligence to contact the borrower, or received the
surrendered property from the borrower. If a mortgagee filed a
NOD before SB 1137 was enacted (July 8, 2008) and did not file a
Notice of Rescission, a mortgagee must include a declaration
regarding contact with a borrower in a Notice of Sale filing,
that either:
1)States that the borrower was contacted to assess his or her
financial situation and to explore options to avoid
foreclosure.
2)Sets forth the mortgagee's efforts, if any, to contact the
borrower if contact was not made.
SB 1137 requires a mortgagee to send a notice to resident of
property being foreclosed (Operative 60 days after July 8,
2008). At the time of filing the Notice of Sale, a mortgagee
must mail a notice addressed to the resident of the property
that informs the resident about the pending foreclosure process,
and suggests that the individual seek assistance as to his or
her rights to live in the residence. The notice must be written
in English, Spanish, Chinese, Tagalog, Vietnamese, and Korean. A
notice translated into the required languages is available on
the Department of Corporation's web site at:
http://www.corp.ca.gov/FSD/pdf/Notice_of_Sale.pdf . This notice
is only required if the billing address for the mortgage note is
different than the property address.
SB 1137 Provides for the Maintenance of Foreclosed Properties.
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After acquiring a foreclosed property, SB 1137 requires an owner
of vacant residential foreclosed property to maintain the
property or be subject to civil penalties of up to $1,000 per
day. "Failure to maintain a property" is defined as the failure
to adequately care for a property, including but not limited to,
allowing excessive foliage growth, allowing trespassers, and
permitting growth of mosquito larvae.
SB 1137 increases the timeframe for a resident to vacate a
foreclosed property. If a new owner is evicting a tenant from a
property after a foreclosure, SB 1137 requires the owner to give
the tenant a 60-day Notice to Quit, rather than the 30-day
notice required in most other situations. The 60-day notice
requirement is not applicable if a party to the note is the
party being evicted from a property.
From a national perspective, recent responses to foreclosure
activity have taken on a new urgency as over the last several
weeks several large financial institutions have announced new
plans to streamline modifications for troubled borrowers,
including recent announcements by Fannie Mae and Freddie Mac the
government sponsored enterprises (GSEs). Additionally, the FDIC
has engaged in a large-scale modification plan with IndyMac
Federal Bank. Below is a summary and discussion of those recent
efforts.
IndyMac-FDIC
On August 20, 2008, IndyMac with help from the FDIC implemented
a loan modification program to assist IndyMac borrowers facing
foreclosure. This program was made possible due to the direct
takeover of the bank by FDIC. The program does the following:
1)Helps borrowers with a first mortgage with IndyMac on their
primary residence who may be, or become delinquent or in
default.
2)Provides that IndyMac will only make modification offers to
borrowers where doing so will achieve for IndyMac or for
investors in securitized or whole loans a net present value
compared to foreclosure. The modification program does not
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guarantee that every borrower will be eligible for a
modification.
3)FDIC determines what borrowers may be eligible for a
modification and sends a borrower a letter with the new loan
modification. The borrower must sign the agreement and send a
check for the modified loan amount, as well as send proof of
income. Once IndyMac verifies proof of income the loan
modification is finalized.
4)FDIC conducts outreach to borrowers who have not yet been
contacted by IndyMac with a loan modification, but who are
experiencing financial difficulty on their mortgage payments.
5)Provides that loan modifications consist of a sustainable
mortgage permanently capped at the current Freddie Mac survey
rate for conforming mortgages. The program also insists that
modification not exceed 38 percent debt-to-income ratio of
principal, interest, taxes and insurance. FDIC established a
policy to reach this debt to income ratio modifications could
adopt a combination of interest rate reductions, extend
amortization and principal forbearance.
6)Allows, if, consistent with maximizing the net present value
of the mortgage, an interest rate reduction below the current
Freddie Mac survey rate is necessary to achieve a 38 percent
debt-to-income, then IndyMac can reduce the rate further for
five years. After five years, the interest rate would increase
by no more than 1 percent per year until it capped at the
Freddie Mac survey rate where it would remain for the balance
of the loan term.
7)No fees or charges are applied for a loan modification and all
unpaid late charges are waived.
Bank of America/Countrywide
On October 5, 2008, Bank of American announced a loan
modification program which will help at least 400,000
countrywide originated mortgages with up to $8.4 billion in
payment relief. The program includes the following:
1)Countrywide will no longer offer subprime, high cost or
negative amortization mortgages.
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2)Modifications designed to reduce interest rates and principal
reductions as well as aimed at borrowers who have a subprime
or pay option adjustable rate mortgage.
3)Broker compensation will be limited to 4 percent of the amount
borrowed.
4)Retention of at least 3,900 personnel to work on loan
modifications.
5)Eligible borrowers must have a subprime mortgage or pay option
adjustable rate mortgage prior to December 31, 2007, and the
property must be owner-occupied.
6)Other criteria may include: the borrower is 60 days or more
delinquent and the current loan-to-value ratio is 75 percent
or higher, the borrower is current today but becomes 60 days
or more delinquent at any time prior to June 30, 2012.
7)Program will be in place by December 1, 2008.
8)Implements a freeze on foreclosures until the program is in
place for borrowers who may qualify for a modification.
9)Targets borrowers with a 34 percent debt to income ratio.
10)Late fees and prepayment penalties will be waived.
JPMorgan Chase
On October 31, 2008 JPMorgan Chase implemented an expanded loan
modification program which will also apply towards Washington
Mutual and EMC borrowers. Implementation will conclude 90 days
after October 31. During this intervening period JPMorgan will
not pursue foreclosure on those borrowers that could benefit
from the new program. The JPMorgan Chase loan modification
program does the following:
1)Expected to help over 400,000 families with $70 billion in
loans in the next two years.
2)Systematically review the entire mortgage portfolio to
determine which borrowers pre-qualify and need help in an
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effort to avoid any unpaid payments. Pre-qualified offers
include interest-rate reduction and/or principal forbearance.
3)Loan modifications only apply to owner occupied homes.
4)Establishes 24 new regional counseling centers to provide
face-to-face help.
5)Hire at least an additional 300 loan counselors.
6)Creates an independent process within JPMorgan Chase to review
each mortgage before the foreclosure process begins.
7)Promises to not add any more JP Morgan Chase loans into the
foreclosure process while implementing the new program.
8)Discloses and explains in plain and simple terms the
refinancing or modification alternatives for each kind of
loan, including using in-language communications.
9)Expands financing alternatives to modify pay-option ARMS,
including 30-year, fixed rate loans with affordable payments,
principal deferral and interest-only payments for 10 years.
Loan modification offers will eliminate negative amortization.
10)Provides discounts on or donates 500 homes to community
groups or government programs.
11)Provides more flexibility with eligibility criteria on
origination dates, loan-to-value rations, rate floors and
step-up features.
On January 16th, 2009, Chase provided an update on its loan
modification plans stating that the program was up and running
and fully operational. Additionally, Chase announced that they
had extended their loan modification program to investor owned
loans that it services. No details were offered as to how
investor owned loans may be modified.
Citigroup
On November 11, 2008, Citigroup announced a new program to
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modify as much as $20 billion in mortgages for borrowers who are
current on their payment but may be at risk of falling behind.
The program does the following:
1)Applies to both subprime and prime borrowers.
2)Designed to reach 500,000 borrowers.
3)Citi is calling borrowers who may have financial difficulty
and offering to modify their loan. Modifications will take
place if their mortgage payment exceeds 40 percent of their
income.
4)Modifications will include lowering the interest rate,
extending the term of the loan, and as a last resort, reducing
the amount of debt.
5)Citi halted foreclosures for about 16,000 borrowers who are
behind on their payment but working on a loan modification.
Freddie Mac/Fannie Mae
On November 11, 2008, a proposal was announced for Freddie Mac
and Fannie Mae to modify loans. The program which starts on
December 15, 2008, does the following:
1)Targets loans 90 days or more past due, must be owner-occupied
and owe at least 90 percent or more of the current value of
the home.
2)Aims to bring the ratio of mortgage payments to 38 percent of
their income by modifying interest rates and in some cases
forgiving principal debt.
3)Asks borrowers to provide a statement or affidavit showing
that they have encountered hardship which affects the ability
to make a mortgage payment.
4)Modifications will only apply to loans made on or before
January 1, 2008 and borrows may not apply if they file or
filed for bankruptcy.
5)Home must be owner-occupied and escrows for real estate taxes
and insurance must already be set up.
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6)Provides servicers to be paid $800 for a successful loan
modification and loan investors are expected to reimburse
servicers for certain fees associated with the modifications.
7)Requires a 90-day trial period and if borrowers successfully
make payments for those 90 days the modification will be
formally approved.
On February 11, 2009 James Lockhart, director of FHA reveal that
the December 15th plan was not having the necessary impact and
that it was time to re-engineer the plan to achieve faster
results. Specific details on the plans of FHA to speed up these
plans was not revealed.
Troubled Asset Relief Program
HR 1424 the Emergency Economic Stabilization Act of 2008, or
also known as the, "bailout bill" provided authority for the
Treasury Secretary to purchase leveraged assets from financial
institutions, including mortgage back securities (MBS).
Like most provisions of HR 1424, the section concerning loan
modifications is very broad and unspecific regarding the actions
that the Treasury Secretary may take to encourage loan
modifications. In granting authority to the Treasury Secretary,
it uses terms such as the Secretary may "encourage" modification
efforts, instead of a clear grant of power to enforce such
modifications. However, recent announcements have indicated
that the Treasury department may move away from the purchase of
assets, and engage in more direct liquidity injections in
troubled companies. The impact on the ability to encourage
modifications is unclear.
Specifically, Section 109, which addresses mortgage loan
modifications, does the following:
1)Requires the Secretary to implement a plan to maximize
assistance to homeowners and use the authority provided to
"encourage" loan servicers to take advantage of the HOPE for
Homeowner's Program or other available programs to minimize
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foreclosures.
2)Provides that the Secretary may use guarantees and credit
enhancements to facilitate loan modifications.
3)Requires the Secretary to coordinate with other federal
agencies and entities that hold troubled assets to identify
opportunities for the acquisition of troubled assets that
would improve the loan modification and restructuring process
and to permit tenants to remain in their homes under the terms
of the lease.
4)In cases where the Treasury owns all or part of the assets of
a mortgage pool the Secretary shall consent to "reasonable"
requests for loss mitigation measures, including term
extensions, rate reductions, principle write downs, or other
means to remove limitations on modifications.
5)Requires the Federal Property Manager (FPM) to implement loan
modification and assistance plans within 60 days of enactment
of the bill.
6)Requires the FPM a report to Congress every 30 days on the
number and types of loan modifications made and the number of
actual foreclosures occurring during the reporting period.
7)Provides that when the FPM does not own a mortgage loan, but
holds as interest in obligations or pools of obligations
secured by mortgage loans the FPM shall encourage
implementation of loan modifications by servicers and assist
in facilitating any modifications to the extent possible.
To date, it is still unclear what exact effect TARP has had on
loan modification efforts.
FDIC national response
On November 14, 2008, the Chair of FDIC, Sheila Bair, announced
the details of her plan to streamline modifications and put
borrowers in into affordable mortgages. In order to be
implemented, this plan would require authorization from the
Treasury Department or Congressional action. This plan
parallels the IndyMac plan and consist of the following:
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1)Housing payments reduced to 31 percent of gross monthly
income.
2)Mortgage rates set to as low as 3 percent for five years with
an increasing rate of 1 percent per year until arriving at the
prevailing market rate.
3)Long terms could be extended to as long as 40 years.
4)The government would step in to provide a guarantee on
workouts up to 50 percent on any future losses if the loan
modification plan leads to default.
5)FDIC would pay servicers $1,000 per work out.
The plan is expected to assist 2.2 million borrowers get new
loans, with around 1.5 million actually keeping their homes,
taking into account re-default. This estimates an average
re-default rate of 31 percent. Furthermore, FDIC estimates
costs of $24.4 billion. The proposal does not include a
statutory foreclosure moratorium.
Obstacles to loan modifications
Staff of the Federal Reserve Board, Division of Research and
Statistics and Monetary Affairs, published a report, The
Incentives of Mortgage Servicers: Myths and Realities (Cordell
et al, 2008) and hereon referred to as The Report. This report
provides much of the background information for the following
discussion.
Re-default
Many borrowers who received modifications default at rates that
range from 15 percent - 40 percent depending on the type, length
and scale of the modification. The November 14th FDIC
announcement, mentioned earlier, of a nationwide solution takes
into account a 31 percent re-default rate.
Historically, the re-default rate on modified conforming Freddie
Mac loans is 20 percent according to Cutts and Merrill. An
Alt-A servicer in the Report conveyed that recidivism rate was
an average of 30 percent. So even on loans that are at the
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margins, re-default is serious concern. Investors reviewing
these numbers may actually find some comfort in the finality of
such processes as foreclosure.
Finally, considering that many loans were underwritten with lax
standards that failed to document income or an ability to repay,
coupled with over-inflated home appraisals it seems fair to
question whether some borrowers could ever sustain a
"reasonable" monthly payment.
As referenced earlier in this analysis, the OCC and OTS produced
a report that found that 55 percent of loan modifications made
by national banks and federal thrifts were 30+ days delinquent
six months after the modification. Critics of this study have
pointed out that many of the early loan modifications were
repayment plans which have historically high re-default rates.
Additionally, the early efforts at loan modifications were aimed
at preventing increased payment shock. These strategies were
not designed to address the extreme depreciation in home prices
that has left millions of borrowers "up-side down" in their
mortgages. Though the results may not be much better for those
borrowers who received some type of principle reduction. On
February 10, 2009 Fitch Ratings released information regarding
the impact of principle reductions and principle/interest
reductions relative to re-default rates. For example, Fitch
found that loans with a principal reduction of 20 percent or
more, roughly 28 percent had re-defaulted six months later.
Additionally, redefault rates for loans that have had a
principle and interest reduction of 20 percent or greater were
21 percent.
Staffing & costs
First, the foreclosure process itself, is costly and time
consuming compared to the costs associated with loan
modifications. Typically, this is the reasoning for FDIC and
others using a net present value determination to measure the
costs of foreclosure versus modification and the possibility of
achieve sustainability of the loan. The potential loan losses
after foreclosure would seem to provide an economic incentive to
modify loans, except for the complications that arise when loans
are in securitize pools (An issue discussed later). Credit
Suisse has reported a loan loss severity rate in value of the
mortgage of 55 percent on securitized mortgages in the six
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months ending in May 2008. Typically the range of losses to
the investor or holder of the mortgage note is somewhere in
range of 40-50 percent.
Servicers, typically, have not had the staff or resources to
engage in large-scale modifications. The servicing industry is
built on a streamlined business model to maximize the flow of
funds from borrowers to lien holders. This system has not
responded well to the time and staff requirements to meet the
needs of borrowers at the levels witnessed over the last 18
months. Loss mitigation requires time and resources to contact
borrowers, verify data, obtain home value estimates, determine
whether the borrower is facing a temporary or permanent setback,
coordinate with second lien holders and calculate net present
value assumptions verses foreclosure. Some recent evidence has
shown that many servicers have made good faith efforts to shift
their models to accommodate an influx of modifications, as well
as, an increase in staff presence. The recent announcements by
the largest servicers covered earlier in this analysis all
reveal a set aside of resources for increased staff and
infrastructure to meet loan modification needs. Fannie Mae and
Freddie Mac, the government sponsored entities (GSEs) will pay
fees for approved workouts to offset the costs, however
investors in private label MBS typically do not pay for such
services.
Pooling and servicing agreements (PSAs) as will be discussed
below, typically require that servicers advance all the
principal and interest payments, as well as tax, insurance,
maintenance, and foreclosure costs, to investors regardless of
whether the borrower is paying.
Servicers get reimbursed for expenses incurred while a loan is
delinquent but only after the property goes into foreclosure, so
getting repaid can take nine months to a year. A foreclosure
moratorium would indefinitely extend the advances that servicers
pay to investors and come as borrowing facilities that servicers
rely on to make advance payments are strained by the liquidity
crunch.
Lastly, an indirect cost of potential loan modifications can be
accounting requirements that may require an immediate absorption
of losses on a restructured debt. If a depository institution
restructures a loan before it becomes seriously delinquent the
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institution must take on that debt as an immediate loss on the
books and can increase the amount of capitol that the
institution must hold. This dilemma provides insight into why
many institutions have either failed or have been bought out by
other entities. When the scale of the bad debt was realized
these entities had to take immediate debt write downs that
required a commensurate back-up of capital that never
materialized, nor was possible in a stale market lacking
liquidity.
Securitization and contractual obligations
The take-off of the mortgage industry over the last decade was
product of the securitization process. Historically, financial
institutions made mortgage loans and retained those loans on
their books. This system has a direct impact on the liquidity
of the institution because the more loans on the balance sheets
means less money to lend to consumers. Securitization allowed
institutions to sell loans to the secondary market and remove
those liabilities off of their balance sheets. Doing this
allows institutions to make more loans and increase overall
market liquidity.
Loans are sold in the secondary market and pooled into
investment portfolios. This process also allowed non-depository
lenders who concentrated on mortgage lending to make loans out
of lines of credit. This process requires the dividing of the
pool into segments, called tranches. The senior tranche might
carry the highest rating (AAA), while the "mezzanine" tranche
carries AA to BBB. The lowest segment, the so-called equity
tranche, is typically unrated. Again, the entire pool might be
made up of the most risky subprime loans, but the senior tranche
may still merit the AAA rating because it always claims priority
of payment and gets its rating sometimes relative to the other
loans in the pool. The senior tranche gets the first dollar of
cash flow, while the lowest tranche takes the first dollar of
loss. Because most borrowers pay their mortgages, money managers
can buy AAA tranches with a relative degree of confidence. For
a more detailed description of securitization please see this
committee's background report, Assembly Banking and Finance
Committee Informational Hearing Subprime Mortgage Crisis In
California: Impact of Mortgage Turmoil on California
Communities, November 1, 2007.
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These securitized pools are governed by complex contractual
obligations between investors and servicers, These PSAs vary
widely but generally provide that the servicer is obligated to
maximize the interest of the investors or certificate holders.
The GSEs provide in their PSA language specific directions on
how to deal with delinquent loans, while private label MBSs may
only give general guidance leaving it up to the servicer to
interpret the best course of action. Several key features of
private label MBS pools distinguish them from GSE pools and can
have drastic impacts on the potential loan modifications.
1)Credit Suisse, in a study of 31 PSAs, found that only two
expressly prohibited modification for a loan in default.
Twelve of the 29 allowed modifications with restrictions, such
as a limit on the number of loans that could be modified in a
particular pool.
2)Some trusts require approval of modifications by the trustee,
who is generally not a servicer and thus not in a position to
evaluated a potential workout, so the trustee sends the
proposal back to the servicer to use the PSA language as
guidance. This can become particularly complex and time
consuming as many servicers look for express guidance on vague
PSA language, yet when questions arise are told to refer back
to the very language that originated the complication.
3)Investors in private label PSAs may not be informed on the
language in many PSAs nor actively monitor servicer
performance.
Obviously, the ability to modify securitized loans is not only
complex, but complicated by contractual agreements and often
counter incentives to modify loan in a pool. Furthermore,
modifying a loan in a securitized pool requires a withdrawal of
the loan from that pool, which is not a simple task considering
the leveraged nature of these MBSs and which may require a
immediate value write down of the assets on the books.
Even government plans to get at the securitized mortgage problem
may not be able to solve the issue. While the TARP plan allowed
the government to by troubled assets and to encourage loan
modifications via the purchase of those assets backed by MBS, it
would still meet with complications due to the securitization
process. Adam Levitin, Associate Professor of Law, at
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Georgetown University concludes that the buying up of MBS by the
government is not enough to give the government the ability to
unilaterally modify mortgages. Typical pooling and servicing
agreements (PSAs) specify that it takes two-thirds of all the
MBS holders in a pool to consent to a modification. Under this
scenario, Treasury would have to buy up two-thirds of the MBS in
a pool to force across the board modifications. However, even
if Treasury could or was willing to purchase the necessary
amount, the conversion of MBS into collateralized debt
obligations further dilutes the ability to purchase the
sufficient number of securities. Professor Levitin advocates
the best way to engage in loan modifications is too allow judges
to write down values in bankruptcy proceedings.
Tranche warfare
Private label MBS pools are carved into tranches from AAA
ratings down through B. Holders of different varieties of MBS
tranches can have different a conflicting interest that can make
loan modifications difficult or even impossible. A servicer's
obligation under a PSA is to maximize the returns to investors
as a whole and not just particular tranches, certain
modifications or outcomes may only benefits one tranche. For
example, the biggest conflicting interest is the investor in a
subordinate tranche could benefit from a loan modification where
otherwise foreclosure would eliminate their equity because
higher tranches would receive the proceeds first of a
foreclosure sale. So those investors at the top have an
incentive not to approve loan modifications, because the
structure of the pools means they will get whatever proceeds are
realized from the foreclosure at the expense of the lower
tranches. With the high recidivism rates of modified loans,
senior tranches may perform foreclosure as an option in order to
take advantage of losses now versus further losses later.
Second liens
Second lien mortgage loans or "piggy back" mortgages gained
popularity in the subprime boom as a workaround for borrowers
who could not make a down payment on the property. Most of
these mortgages were split into a loan of 80 percent of the
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properties value and junior lien for the remaining 20 percent.
Among securitized subprime loans the average loan to value (LTV)
ratio on loans with a junior lien was 99 percent. Some
borrowers used home equity lines of credit after the origination
of the first mortgage as a way to tap accumulated home equity,
or at least tap the appearance or promise of increased home
equity. To put this risks into further perspective, the share
of subprime loans, according to the Report, that were 2/28s
(meaning two years fixed and adjusting thereafter) coupled with
junior liens reached 35 percent in 2006. Data from First
American LoanPerformance estimates that 22 percent of properties
with subprime loans had a junior lien at origination and 31
percent of loans that seriously delinquent have a junior lien.
The true number may be even higher as many borrowers were able
to attain second liens from a different lender than the first
lien holder.
Attempted loan modifications where a second lien exists become
difficult because the second lien holder must agree to the
modification and possible extinguishment of their lien holder
rights when they stand to make no benefit. Junior lien holders
have been slow and reluctant to agree to re-subordinate in this
episode and have held up refinancing, modifications, and short
sales.
Given the legal uncertainties surrounding modifications, senior
lien holders generally require the junior lien holder to
affirmatively agree to subordinate their claim to the modified
senior lien before agreeing to the modification. In today's
depressed housing market, when a mortgage is being modified it
is likely that the junior lien holder has essentially no equity;
thus, a big part of the value of the lien is the ability to
extract a payment from the senior lien holder in a workout.
Other issues with junior liens include:
1)Newer liens usually have lower priority then older liens.
2)Given the legal uncertainty regarding the seniority of their
claim following a modification, senior lien holders are
reluctant to undertake a major modification of a loan and then
become junior to another lien-holder. In practice, senior lien
holders generally require the junior lien holder to
affirmatively agree to the modification by agreeing to
re-subordinate.
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3)Conversations with servicers indicate that the GSEs routinely
paid junior lien holders to agree to re-subordinate. These
payments ranged from $1,000 to $2,000 to as much as $5,000 in
some circumstances.
4)Servicers may not have the operational controls or experience
to get second-lien lenders to agree to re-subordinate quickly.
5)Sources at the GSEs indicate that junior lien holders have
started demanding larger payments in order to agree to
re-subordinate. This may be because junior liens are no longer
always the traditional piggyback, but may be HELOCs with
balances of $50,000 or more.
6)In the past year, prices for pools of delinquent closed end
subprime second liens were around 1 to 3 cents on the dollar,
and prices for lower-rated tranches of securitized subprime
second liens were in the same low range, between 0 and 5
cents.
7)In the case of short sales, junior lien holders must agree to
release their liens and take a loss. Servicers have reported
instances where delays in resolving disputes between junior
and senior lien holders results in prospective buyers of the
property going elsewhere, forcing the loan into foreclosure.
Recent announcements
Bankruptcy reform ("cramdown")
H.R. 200, a plan that would allow the mortgage on a primary
residence to be part of a "cram-down" in Chapter 13 bankruptcy
proceedings, is currently pending in Congress. What this means,
is that the mortgage could be reduced by the bankruptcy court to
an affordable level for the borrower, in addition to other
assets. Currently, a debtor could get the debt on a boat, car,
or second home modified through bankruptcy, but not their
primary residence. The arguments range on the merits of this
proposal. Many in the lending industry are concerned that
borrowers will rush to bankruptcy courts to alleviate mortgage
debt and that the risk of such behavior will make new mortgages
more expensive. The other side of this debate is that it is
absurd to allow the modification of second homes and luxury
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items, but not a primary residence. Mortgage "cram-down" would
not necessarily benefit every borrower who seeks Chapter 13
protection. Under Chapter 13, debtors may be subject to
questioning and examining by the court. The Bankruptcy trustee,
operating for the court, has full access to the debtors'
financial situation from 3-5 years and even after the borrower
may still owe unsecured debt to several creditors.
Others view the potential threat of bankruptcy as a tool to
encourage servicers to modify mortgages prior to borrowers
actually needing to file for Chapter 13.
Broader federal policy on loan modifications
Treasury is expected to announce in the coming weeks a plan that
will commit $50 billion to foreclosure prevention, establish
loan modification guidelines and provide flexibility to previous
loan modification programs. Furthermore, institutions that
receive federal moneys would be required to follow the loan
modification guidelines. At the time of this writing, media
outlets are reporting rumors that a new foreclosure relief plan
would involve the government subsidizing a reduction in monthly
payments for overstretched borrowers. Based on limited
information in these recent reports it appears to be a plant
that would involve a reduction in principle and/or interest on
outstanding balances with the government making up the
difference in loss.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
Adam Dondro / BUDGET / (916) 319-2099
FN: 0000129