Much Ado About Nothing: Wall Street Weighs In on Subprime Loan Mods

The American Securitization Forum issued loan mod guidelines today, a step I find interesting on oh-so-many different levels, not the least of which is the fact that the ASF’s position paper represents Wall Street’s “best foot forward” thus far in an attempt to unify investor guidelines around loan mods.

Or, at least, that’s what this should have been. As we’ll soon see, everything is not as it seems here.

The real power behind an initiative like this at the ASF is the potential power it has to set a more uniform standard regarding loan modifications in a third-party servicing environment. Because servicing rights are stripped off, sold and resold, and because loans change hands numerous times throughout the mortgage lifecycle, the problem most servicers have is determining how, when, and which loan modifications are allowed as per whatever investor happens to hold the loan at a particular point in time.

I remember one loss mitigation manager at a very large subprime servicer complaining to me regarding the difficulty of servicing third party for 50 different investors with 50 different guidelines — what one allows, the other invariably won’t allow, and oftentimes the software systems used to track this information either aren’t up to date or are inadequate for tracking investor guidelines fully.

That’s what I thought the ASF set out to tackle with this announcement. Unfortunately, the ASF starts out with a good idea and fails to execute on it. They start by touting “a statement of principles, recommendations and guidelines for the modification of subprime residential mortgage loans that are included in a securitization.”

I read that, and I got excited about some real change being effected. Then I read this and fall back to Earth:

As a general matter, ASF recommends that loan modification should only be made in a manner that is consistent with securitization governing documents; in a manner that serves the best interests of borrowers and securitization investors; where there is a reasonable basis for concluding that the borrower will be able to make scheduled payments on the loan as modified; and where the net present value of the payments on the modified loan are likely to be greater than the anticipated net recovery that would result from foreclosure. (emphasis added)

What a letdown: I assumed the entire point of issuing these guidelines would be to unify the language in securitization governing documents as to loan modifications. Otherwise, what’s the point?

In the end, this announcement amounts to all pomp, and no circumstance. It probably looks great to the media — look, Wall Street is policing itself! — when in reality it changes nothing for the majority of loss mitigation managers out there, who still must work with inadequate systems and deal with changing and inconsistent investor guidelines.