FHA Mortgage Workout Lacks Incentives and Creates Problems: Industry Sources
New plans to push lenders to offer principal forgiveness and originate Federal Housing Administration (FHA)-backed refinance mortgages are leading borrower advocates to argue that the program isn’t enough to entice lenders and servicers to participate. Additionally, industry players are concerned over the potential moral hazard the initiative potentially presents. The Obama Administration announced the allocation of $14bn in Troubled Asset Relief Program (TARP) funds to incentivize lenders to provide principal reductions and refinance underwater borrowers into FHA-backed mortgages. Under the terms of the voluntary program, lenders will be required to write down at least 10% of the mortgage principal for borrowers who are current on their payments. The program is open to borrowers whose mortgage isn’t currently insured by the FHA. The principal reduction must bring the new FHA loan to value (LTV) to 97.75% and make the new payments account for 31% of the borrower’s monthly income. The program also offers incentives to lenders who offer borrowers with second lien mortgages similar principal reduction and refinance options. The maximum allowed LTV of the combined loans is 115%. John Taylor, president and CEO of the National Community Reinvestment Coalition is one such advocate. In a prepared statement, Taylor said there is a discrepancy between government support for large financial institutions and individuals. “We rush to give banks tax breaks, but we dawdle to help homeowners who through no fault of their own lost their jobs because of the economic crisis or bought defective loans that caused the economic crisis,” Taylor said. “Let’s not be so quick to forget that we bailed out banks, but we’ve nickeled and dimed innocent borrowers. Moral hazard? The moral hazard is allowing borrowers to pay the price for the crimes of Wall Street.” Lee Howlett, president of mortgage technology and service provider ISGN’s servicing practice, told HousingWire that the principal forgiveness initiative was expected. “We’ve seen sequential progress toward that over the past year and a half,” he said. But Howlett believes the industry would have been better served had the principal forgiveness incentives been implemented from the start. “It’s frustrating in the sense that the people that have gone through some kind of modification, now come back and say I want my principal reduced,” he said. “Every time you announce a program six months after the old one, you run that risk of everybody that’s in the midst of a current trial modification to quit.” Friday’s announcement left many unanswered questions. According to a Treasury Department release, full details will be announced in an upcoming mortgagee letter. In the meantime, some have questioned how the program will interpret a borrower’s current payment status. Cheryl Lang, president and CEO of Integrated Mortgage Solutions believes the rules will be fairly lenient and the program’s requirements will turn a blind eye in the event a borrower has had a few slip-ups in the fast. “If they’re allowing FICOs in the 500s, then they will pretty much put up with anything,” Lang said. That being said, Lang believes the program will serve as an alternative to borrowers considering strategic default and deter borrowers from purposely defaulting to qualify for other workout programs. Steve Horne, president of specialty servicer Wingspan Portfolio Advisors, said principal forgiveness “absolutely” has a place at the table as a loan resolution strategy and makes more sense than foreclosing at the rate that the industry has been foreclosing, though like many things, he said, the devil is in the details. “I am a little concerned that the borrowers get the immediate benefit of principal forgiveness without any requirement for future performance,” Horne said. “I’d like to see some more contingent forgiveness.” Another lingering question what valuation method will be used to determine the LTV of the underwater borrower. While the Making Home Affordable programs rely on broker price opinions (BPOs), Brian Coester, CEO of appraisal management company (AMC) Coester Appraisal Group, said appraisals are the most appropriate valuation method for the FHA refinance program because he believes the reports will most accurately gauge a property’s value, but that could limit the number of borrowers eligible for the program. But, he added, limiting the number of participants is a better alternative than working off inaccurate valuations. “Ultimately it’s not going to do any good to the lender or the borrower’s community as a whole because working with bad information leads to bad decisions,” Coester said. Write to Austin Kilgore.