National Foreclosure Mitigation Solutions

2. We urge the Administration and Congress to establish a GIE to hold as well as attract equity investments made in qualified Single Family Residences (“SFR’s”). The initial investor in the GIE would be the Federal government. The goal would be to restore the mortgage market back to health. Currently, the mortgage market depends on government-sponsored or government entities, because investors have lost so much faith in the private origination and securitization of loans.The current environment mandates a total rethinking of how this problem is approached.

3. We believe the solution suggested in this paper does not call for new funds other than that which is already set aside under the current TARP (Troubled Asset Relief Program) programs as well as the exposure Government Sponsored Enterprises (“GSE”) already have through various guarantee programs. Many of the problems now plaguing current Federal foreclosure mitigation programs are inherent in their designs and cannot be resolved at this late date. Absent a dramatic and unexpected increase in enrollment in Federal foreclosure mitigation programs, many billions of dollars set aside for foreclosure mitigation may well be left unused. As a result, an untold number of borrowers may go without help, all because there was a failure to acknowledge the shortcomings of foreclosure mitigation programs in time.

4. In October 2008 under the direction of former President Bush the US Congress enacted the Emergency Economic Stabilization Act (EESA). In addition to creating TARP, EESA included the legal authorization and proscribed design elements for the US Treasury to implement a national foreclosure mitigation program. On March 4, 2009, newly elected President Obama and his new Treasurer (Timothy Geithner) announced the formation of the “Making Homes Affordable” program which contained a subprogram called the Home Affordable Modification Program (HAMP). HAMP specifically was created to address the mandates established by Congress in EESA for a national foreclosure mitigation program. HAMP was established to reach out to 3-4 million US homeowners and assist them in preserving their homes. HAMP was funded by Treasury with $75B in TARP funds; $ 25B dedicated to Borrowers with Fannie and Freddie home loans and $ 50B was set aside specifically for Borrowers with private label mortgages. As of December 2010, Treasury has spent less than $ 1B of the $ 50B set aside to assist Borrowers with private label mortgages and the GAO estimates that Treasury will only spend about $ 4B on HAMP over the life of the program.

5. The current environment in HAMP is neither efficient nor effective since homeowners, servicers and investors are faced with the protracted struggle of finding a solution. Current program solutions tend to be negative for at least one party and positive for another party (a zero sum game). The struggle over who has the stronger hand is, by default, where all the energy is going. These conundrums became even clearer as programs like HAMP and the Second Lien Modification Program (2MP) were introduced to address the crisis. Modifications were at best struggles to remain whole on the part of the servicer and investor in order to avoid the write down and resulting capital reduction. Borrowers prefer solutions that let them off the hook from the mess they feel they had got themselves into…like a short sale.

6. The “HUD Loan Counselors” put in place (under federal, state and private sector programs) have not been given effective tools to determine the real economic neutral point between the holder of the mortgage and the borrower. As a result, in the majority of cases, even those modifications that are crafted have been short lived and the borrower is in default again within three to six months. Our approach strives to find an optimal solution where we match as closely as possible the points of preference for each participant. The health and recovery of the USA economy is at stake and our focus must be on stability and the return of confidence as opposed to finding someone to blame or realize windfall gains (on either side of the issue). The solution being suggested in this paper offers opportunity and economic gain to many potential participants in the longer term. Nevertheless, in the near term, the foreclosure crisis needs to be fixed and the market made stable once again.

7. The time to process a foreclosure continues to extend every day due to the current impasse which adds to an already extended timeline required to process all of the steps required in a foreclosure. The foreclosure process varies from state to state. Whether the state follows a judicial or non-judicial remedy path the basic milestones of a) delinquency, b) default, and c) sale in each case come with stipulated time allowances. The borrower is allowed time to cure the default and participate in various forbearance programs in between and after each of those milestones. In many states, there is ultimately a redemption period once a foreclosure sale has taken place. These phases are each important and valid steps to ensure the borrower has sufficient opportunity to cure their predicament the consequences are clear. The number of participants, the volume of paperwork, the growing complexity along with the mistrust and confusion is overwhelming all the participants. Currently, there is an ongoing investigation conducted by a joint task force of Federal and State banking Agencies of major servicers.

9. To the borrower it would be sharing in the investment in their home and ultimately sharing in any value appreciation experienced over time.

10. To the government it would be to place/invest funds that it already has exposure on from existing programs but with a built in recovery mechanism that minimizes the taxpayer exposure while stimulating economic activity and fostering stability.

11. The program design should support homeowner wealth building as opposed to allowing easy access to funds for discretionary spending. Further, cash should not be removed except for controlled circumstance such as “value added” home improvements, education or health related events.

13. The GIE would be responsible for tracking and managing the portfolio in order to protect investments in the GIE. The GIE would provide regular information updates for compliance as well as report on all the multidimensional risks that drive regulatory capital and economic capital in banks as shown in Figure 1. The GIE would structure documents and supporting information to ensure an initial and ongoing timely access to the information in order to monitor the completeness and integrity of the operating and risk information provided.

15. Borrowers began to default in droves which resulted in a never-ending game of catch-up. Independent mortgage servicers and bank owned servicers alike were unable to devote enough manpower to modify, or ease the terms of loans to millions of customers on the verge of losing their homes. Mortgage servicers have shown that they are ill-equipped to deal with the operational risk arising from the foreclosure process. Mortgage security holders, servicers and securities trustees did not comprehend or prepare for the current magnitude of foreclosures. According to Kurt Eggert, securitization also amplifies the risk of foreclosure by making it harder for borrowers to obtain appropriate loan modifications. Securitized loans are exhibiting higher foreclosure rates than non-securitized loans, not only because of the effect securitization had on underwriting, but also due to the fact that third-party servicers act on behalf of investors to collect mortgage payments, monitor defaults and also foreclose. Securitization makes it more difficult for borrowers to resolve problem loans due to such factors as “tranche warfare” whereby a servicer is concerned that a loan modification may benefit one tranche of a mortgage deal above others, leaving the servicer open to claims of favoritism and breach of the fiduciary duty to treat all classes fairly (Eggert, 2002).

16. Servicers self-interest also encourage excessive foreclosures, as servicers may benefit more from the foreclosure then they would from a loan modification (Eggert, 2007). Mortgage servicers earn revenue in three major ways. First, they receive a fixed fee for each loan. Typical arrangements pay servicers between 0.25% and 0.50% of the note of each loan. Second servicers earn “float” income from the interest accrued between when consumers pay and when those funds are remitted to investors. Third, servicers often are permitted to retain all, or part, of any default fees, such as late charges that consumers pay. In this way, a borrower’s default can boost servicer’s profits.

17. A significant portion of the servicers’ total revenue comes from retained-fee income. Servicers’ incentives upon default may not align with investors’ incentives. Some observers are concerned servicers have incentives to make it difficult for consumers to cure defaults. As a result, there is neither confidence nor a well designed process in place to respond to the crisis.

18. The key is to get the mortgage servicer back to their intended function of servicing the mortgages as opposed to getting involved in loan modification detail. Mortgage servicers got bigger and bigger as the housing market grew. But the current deluge of foreclosures has overwhelmed servicers and unfortunately many servicers have not been able to keep up with necessary internal checks and balances to ensure compliance with the very complex sensitive process, which has led to a widespread delay or even halt of foreclosures and to investigation by a task force of 50 states Attorneys General.

19. Mortgage servicers had few financial incentives to invest in their default handling capabilities within their servicing operations. A mortgage servicer’s investment in people, training and technology costs them a lot of money and they have no incremental incentive to staff up. Technically in a majority of the cases they were not the originator nor are they the holder of the mortgage. Their duty is to service and they are neither equipped to negotiate modifications on a massive scale nor are they authorized, without specific directives from the holder, to take any write downs (not to be confused with the write-off a holder takes against a security). If for example a mortgage generates an annual fee equal to 0.25 percent of the loan’s total value (unpaid principal balance) this only provides approximately $500 a year in annual fees on a $200,000 mortgage. That revenue will evaporate once a loan becomes delinquent, while the cost of a foreclosure can easily reach thousands of dollars and the mortgage servicer’s share of that cost will eliminate the profits generated from primary business activity of handling healthy performing loans.

20. 2124075986790Box 1 - Solution Variables00Box 1 - Solution Variables223647012534902303145125349000206692598679000This explanation is not intended to excuse or accuse any of the constituent parties. It is intended to point out the practicality of the situation and set of overwhelming obstacles to previously attempted resolution efforts. This proposal starts with a clear set of parameters and rules for all parties. There is no attempt to blame or admonish, but rather design a balanced set of procedures that is both corrective and stimulative as it takes affect. Under this proposed solution the borrower candidates would be handed off to a cadre of “loan counselors” equipped with the tools to determine the optimal solution incorporating the borrower’s ability to repay and the needs of the relevant holder into account.

21. The GIE would issue clear Rules and Procedures. For example, a reasonable rule would be all SFR’s with a current combined Debt to Income (DTI) of over A % and under B % (e.g. A =31% and B = 60%) would be eligible. The loan to current value ratio (LTV) would need to be less than C % (e.g. C = 175 %). All borrowers must be able to prove they have the available funding to meet their calculated revised payments (that is a payment that achieves a DTI of A). The use of the residential asset as collateral for a new loan would be prohibited. For the readers convenience the suggested level for these and other variables are listed in Box 1. The variables identified above are criteria that would in turn be utilized in a specially developed “Quality Risk Index” (See section 7.0) designed to support a standardized view of the quality of all mortgage portfolios.

22. -514352755265Box 2 - Crisis Management Plan00Box 2 - Crisis Management PlanThe GIE, on an ongoing basis, would confirm the income source (e.g. from an employer, binding contracts and tax returns etc.) and obtain proof of installment loan balances annually along with a certificate as to the true and correct information (annually). The GIE would also get a certificate of borrower occupancy (annually) and make an initial disbursement to the Holder (e.g. lender or investor) either directly or through the designated trustee or servicer. The GIE would also ensure that the Title, Deed, and other relevant mortgage documents properly reflect the GIE investment and related rights and interest. The GIE would also ensure the sale is properly documented during the first D years (e.g. D = 5). The GIE would oversee all secondary market activity and control the terms and structure of private sector activity in order to minimize speculative activity. Each State would be required to provide periodic reports on all relevant activity such as status of property tax rates and payments for each mortgage in the program.

23. -5143510985500

24. -3186430259080-326326520066000The GIE would need to put in place an effective crisis management plan as shown in box to the left.

26. The state must agree to adjust the Real Property Tax basis to reflect the adjusted loan balance for the first 5 years. The state and municipal governments would need to agree to accept past due taxes on participating properties over an E year period (e.g. E = 5) which will be calculated into the DTI ratio and be included in escrow.

28. If the borrower should become delinquent on F payments and foreclosed upon, the borrower will be allowed to rent the property upon meeting pre-established conditions and submit annually the proof of occupancy. The borrower is to provide an updated financial statement-of-condition (e.g. source of funds, proof of installment borrowings etc.) and also certify the accuracy of the information. The borrower may pay a loan counselor up to $100 to assist in the filing and preparation of the annual documentation required. The servicer will be required to provide documentation showing payment on the specific loan each month.

29. If the borrower is delinquent G payments (e.g. G = 2) then the GIE will give notice to borrower and holder of intent to take title to property. Delinquency of the H payment (e.g. H = 3rd) will automatically initiate a fast track foreclosure. The intent is to keep this all doable quickly and allow all who wish to participate an opportunity to do so. Nevertheless, in doing so, those that participate must agree to specific terms that will be monitored and enforced. If the borrower defaults on the third payment then the property is transferred to the GIE who takes over the obligation or delivers to the holder depending on the specific program involved.

32. Variables provided by holders must fall within an industry range and must be supported by documentation. The objective is to get holders back into an “indifferent” position toward the asset by bringing it into an acceptable risk position and yielding a risk adjusted return acceptable to the industry. These portfolios should not yield higher than the industry average ROE. Further, since the holder is not taking a write-down they would pick up the costs of the loan modification and related filing requirements.

35. Consent that the funds, once determined and approved, go directly to holder(s) to reduce the loan(s) outstanding;

36. Share K% (e.g. K = 25%) the gain on sale after the initial GIE investment is returned;

37. Put GIE on title to reflect investment and right of final consent on any ownership changes until investment is returned and it receives its proportionate share of any gain realized;

38. Stay in their home D years (e.g. D= 5) unless required to relocate for employment or health reasons;

39. Provide updates on pertinent personal data every six months for the first 2 years and once a year every year thereafter; and,

42. End Notes