Foreclosure Relief Is Getting Lost In Fine Print of Loans
Thursday, November 13, 2008
More than a year into the foreclosure crisis, whether a distressed homeowner is eligible for a more affordable mortgage can often come down to the fine print.
That fine print in contracts that govern mortgages bundled into investment pools dominated a House Financial Services Committee hearing yesterday as lawmakers questioned whether lenders are doing enough to keep people in their homes.
Millions of loans are held in these pools, called securitizations. They are governed by contracts that dictate what changes can be made to the loans. Lawmakers and industry officials debated yesterday the degree to which those agreements are making it difficult to modify a homeowner's loan and thus hampering foreclosure prevention efforts.
Michael Gross, a Bank of America executive, told the committee that the rules vary depending on the investment group. Some "may prevent us from doing modifications that would benefit borrowers and investors," he said. Under some contracts, he said, "loan modifications are expressly disallowed."
Lenders have had the most success modifying mortgages they own, lawmakers said, but run into trouble when they administer the loans held in pools for others, known as servicing. "Where we're running into a problem is with securitizations, and that's really the great majority of . . . mortgages that are in foreclosure or threatening foreclosures," said Rep. Spencer Bachus (R-Ala.).
Legislation may be needed to resolve these issues, said Rep. Barney Frank (D-Mass.), chairman of the Financial Services Committee. "We are getting some progress where the legal authority to modify is clear. It took a while, but it's coming," he said. But "we have not had that where there are servicers" that are administering the loans for investors.
The mortgage crisis has grown too big for the industry to handle, said Thomas Deutsch, deputy executive director of the American Securitization Forum, an industry group for financial firms. "Macroeconomic forces bearing down on an already troubled housing market are simply too strong for private sector loan modification initiatives alone to counteract the nationwide increase in mortgage defaults and foreclosures," he said.
The debate comes as the government response to the foreclosure crisis is evolving. Treasury Secretary Henry M. Paulson Jr. said yesterday that his agency is abandoning plans to buy toxic mortgage assets, which would have allowed it to pursue more aggressive loan modifications. That goal must be met another way, he said.
"Maximizing loan modifications, nonetheless, is a key part of working through the housing correction and maintaining the quality of communities across the nation, and we will continue working hard to make progress here," he said. "Foreclosure prevention is something I'm going to keep working on right up until I leave."
The Department of Housing and Urban Development is considering changes to a key loan modification program just a month after it was launched. The program, Hope for Homeowners, was expected to help 400,000 borrowers get new loans. But lenders have balked at a requirement to lower the principal owed on the loan to qualify for a refinancing deal under the program.
So far the program has helped only 42 homeowners, and HUD now expects only 20,000 applications over the next year. "The administration is continuing to look at a range of options to reduce foreclosures," HUD spokesman Stephen O'Halloran said.
Researcher Eddy Palanzo contributed to this report.