Consumer Avocates Want Fannie, Freddie to Follow FDIC on Loan Mods
Fannie Mae (FNM) and Freddie Mac (FRE) may no longer be able to lobby, but consumer advocacy groups sure can -- and they're already pressing regulators and legislators to see Fannie and Freddie enact wide-scale loan modifications for troubled borrowers. Think FDIC and IndyMac, but on a much grander scale. American Banker reported Wednesday that the Federal Housing Finance Agency said that both GSEs may soon have to "speed up and improve" loan modification efforts for troubled borrowers, citing remarks from director James Lockhart. "We have been discussing loan modifications over the last nine months with the companies, and we have prodded them to be creative and aggressive," he told the publication. Bruce Marks, the president of the Neighborhood Assistance Corp. of America and well-known for his bullying of lenders and servicers, said that Treasury secretary Henry Paulson "will no longer be able to claim he tried but servicers refused." "Look what Sheila Bair's doing — she's walking the walk, as well as talking the talk," Marks told Amercan Banker. "Now we need Secretary Paulson to walk the walk, as well as talk the talk." The publication also reported that other unnamed consumer advocates were already pushing the FHFA and the Treasury on loan modifications well ahead of the Treasury's move to essentially nationalize both companies. The IndyMac model The FDIC's operating of IndyMac Federal Bank in the wake of the former Alt-A lending powerhouse's failure earlier this year has been seen as a test case for wide-scale loan modifications under a plan advocated by FDIC chairman Sheila Bair. On Aug. 20, FDIC officials announced a broad loan modification effort they say will help thousands of troubled borrowers with IndyMac loans. The FDIC said it would focus on actively modifying loans for delinquent and severely delinquent borrowers, employing so-called "affordability modifications" en masse; in other words, the FDIC will look to write down loans to roughly whatever levels the borrower can afford, a strategy that has long been advocated by consumer groups but panned by industry representatives. In the program details, the FDIC said it would look to put borrowers with various Alt-A loan products into "affordable" mortgages that would reduce their payment load down to a 38 percent payment-to-income ratio, including principal, interest, taxes and insurance — even if that means writing off principal, or reducing rates well below current market rates to get there. Borrowers looking to qualify for the program would need to document their income and provide proof of primary residence, the FDIC said. It's unclear if the program has yielded results thus far, although most industry insiders that spoke with HW remain skeptical; investors are also watching closely, to determine what the modification effort will mean for their investments. "If the FDIC follows its stated plan, which is to maximize loan value or recovery value, a good chunk of these mods won’t go through anyway, despite the press given to it," one senior banking official told HW last month, when the plan was announced. "The FDIC will find out what every other servicer already knows: for one thing, the majority of borrowers will simply ignore the offer. For another, those that do step up will give credible proof that they cannot afford their homes unless the FDIC were to undercut home value by 40 or 50 percent from current levels." Beyond questions as to whether or not the plan will actually work, there are questions surrounding whether such an approach could further hurt both mortgages and housing. Director of RMBS trading at Deutsche Bank (DB), Christopher Helwig, said in a recent research note that the IndyMac modification plan would likely have an "extremely onerous" impact on the capital structure of IndyMac deals. "Rate reductions lead to potential interest shorfalls causing deals to miss their overcollateralization targets and fundamentally weakening credit enhancement to senior note holders," he said. "While this may have the net effect of flattening the CDR curve, this will in all likelihood not improve deal performance." Helwig also suggested that principal reductions would be "significantly detrimental to a large majority of the securitized cashflows." Bob Caruso, executive vice president at Lender Processing Services Inc. (LPS), told American Banker that pushing a program of significant principal write-downs would "probably extend the semi-recession or the property depreciation event, because more customers over time are going to be looking for more workouts." The man knows what he's talking about: Caruso was recently the head of home lending at Bank of America Corp (BAC). Disclosure: The author held no relevant positions when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.