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Revised Homeowners' Aid Plan Finds New Potential Backers
The new Mortgage Investors Coalition has embraced the program and is repeating an argument often made by consumer advocates that loan modifications that include principal reductions are the most effective methods for helping homeowners, especially in parts of the country where home values have tumbled the most.
"Hope for Homeowners more broadly addresses the issues of housing stabilization, negative equity and affordability, whereas current modification programs are cosmetic fixes that are not addressing the underlying equity problem," said Thomas C. Priore, chief executive of ICP Capital, a New York fixed-income investment firm that helped start the investors coalition.
There is another reason the investors support the program: They want to cut ties with troubled borrowers. While a traditional loan modification keeps a problem mortgage in an investor's portfolio and the homeowner could default again, Hope for Homeowners sweeps the mortgage off its books. The government program refinances the borrower into a new loan that can be held by a different investor.
The program creates a market for these loans that institutional investors otherwise would struggle to sell, officials in the financial services industry said. And as the industry strives to put the growing losses of the housing crisis behind them, in some cases it may be better to accept them now than hope to sell the securities later, they said.
"Both investors and borrowers' incentives are aligned to make this program work, because investors want to take their losses now, and borrowers want to get into a more sustainable mortgage," Deutsch said.
But the program has some potential stumbling blocks, particularly in how first- and second-lien holders are treated, said Micah Green, a partner with Patton Boggs. The lobbying firm was hired by the Mortgage Investors Coalition, which represents investors with more than $100 billion in mortgage-backed securities, Green said.
Many first mortgages are held by investors in large pools, while the majority of second liens are on the books of large banks, he said. Second-lien holders are forced to take substantial losses or are nearly wiped out under Hope for Homeowners regulations and have refused to participate in the program, Green said.
Under the legislation signed by President Obama last week, second-lien holders could share in the profits if borrowers sell their home after refinancing. But that may not be enough to persuade them to participate, Green said. For instance, under the government's other large foreclosure prevention plan, Making Home Affordable, second-lien holders are also eligible for incentive payments.
Until government regulators address the imbalance, Hope for Homeowners "will not be sufficiently utilized," Green said. "If you create a balance between the two, there is a better chance that homeowners will not only be able to stay in their homes but begin to have positive equity in their homes, providing the incentive to stay."