Ted Kaufman - United States Senator for Delaware

Commercial Loan Restructuring Model Said To be 'Logical Way' to Fix Underwater Loans

Source: Bureau of National Affairs

By Jeff Day

October 28, 2010

The “logical way” to resolve the foreclosure risk faced by millions of working homeowners whose mortgages are underwater would be for borrowers and lenders to follow the very successful commercial property loan restructuring process, an official overseeing the Troubled Asset Relief Program (TARP) said at an Oct. 27 hearing.

J. Mark McWatters, a tax attorney with 25 years experience in mergers and acquisitions and corporate finance, explained to a witness panel including Faith Schwartz, senior adviser to the mortgage-industry-backed HOPE NOW Alliance, that principal and payment reductions are the standard practice when a commercial property's value falls below its mortgage debt.

Restructurings maximize the lender's return by preserving a revenue stream and giving it a stake in any future equity gain, making the principal reduction in the best interest of both parties, McWatters, who serves on the TARP Congressional Oversight Panel, said.

That model will not work in the securitized residential mortgage market, because of contractual agreements between mortgage services and investors, Schwartz replied.

However, Schwartz said later that the mortgage industry and nonprofit counseling agencies comprising HOPE NOW managed to permanently modify 874,000 mortgages between Jan. 1 and Aug. 30, with 80 percent of those proprietary loan modifications reducing homeowners' monthly payment, including a reduction in the interest rate. She did not provide data on the value of the modifications.

Only half as many permanent loan modification have been achieved under the Treasury Department's Home Affordable Modification Program, Schwartz said.

Treasury Modification Program Hit.

Congressional Oversight Panel members grilled Phyllis Caldwell, chief of the Treasury Department's Homeownership Preservation Office, over the small fraction of distressed homeowners that have been helped by the program. COP's chairman, Sen. Ted KAUFMAN (D-Del.), noted that while President Obama launched HAMP in February 2009 with the aim of helping help 3 million to 4 million homeowners avoid foreclosure, it has helped only a small fraction of homeowners achieve permanent loan modifications. KAUFMAN also noted that only a tiny fraction of the $29 billion allocated to HAMP has been spent.

The COP chairman's criticism came one day after TARP Special Inspector General Neil M. Barofsky released a highly critical report on the program (206 DER EE-16, 10/27/10).

Caldwell Sees HAMP Success.

Caldwell suggested to the panel that the HAMP program has been much more successful than the statistics indicate. The 700,000 homeowners who received temporary protection from foreclosure but failed to qualify for permanent loan modifications were given “breathing room” during which they could move to affordable housing, she said.

Making Home Affordable has also been a catalyst for private sector loan modification efforts and set a “benchmark for sustainable modifications,” Caldwell said.

A series of major program adjustments has greatly increased the number of permanent loan modifications, including the January 2010 requirement that all income and debt documentation be assembled before the application for mortgage modification can be made, she added.

KAUFMAN expressed concern about the small number of HAMP loan modification applications that were filed in August, some 20,000, suggesting that the program is failing due to the negative public perception that emerged from the high number of temporary modifications that failed.

Caldwell said HAMP's public reputation was damaged but that it is beginning to improve as stakeholders learn about its recent performance. Among the 460,000 homeowners with permanent modifications, the median monthly mortgage payment has been reduced 36 percent, more than $500 a month. Of the modifications made in the fourth quarter of 2009, only 7.9 were delinquent after three months and 10.8 percent after six months, she said.

Caldwell noted that the administration has launched several other programs to help distressed homeowners in 2010, including the HA Hardest Hit Fund, the Home Affordable Foreclosure Alternative Program, and the FHA Short Refinance Program that provides incentives for short sales and deeds in lieu of foreclosure for homeowners who don't qualify for HAMP.

Better Data on Loan Services.

KAUFMAN said the COP panel wants better information on proprietary loan modifications, including data on the performance of individual firms.

Office of the Comptroller of the Currency Deputy Controller John Ever said OCC has confidential data on individual bank performance that it uses for supervisory purposes, but said it will publicly report only aggregate data.

KAUFMAN asked if loan services would voluntarily release their performance statistics. Schwartz replied that the industry would rather have that determined through regulatory processes.

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