HAMP Must Address Second Liens, Congress Hears
[Update 1: clarifies Krimminger's comments.] A key federal mortgage workout plan, the Home Affordable Modification Program (HAMP), that allocates incentives to servicers, borrowers and lender/investors is failing to address the issue of second liens, according to expert testimony from regulators to a House Financial Services Committee. At an ongoing hearing Tuesday, officials told the Committee a clearinghouse might be required to mediate between first and second lien holders until a modification can be agreed upon. Earlier at the hearing, Laurie Goodman, senior managing director at Amherst Securities, pointed toward the key role negative equity plays in predicting default behavior, saying HAMP's failure to address negative equity meant it was destined to fail. Only principal reductions can make a lasting effect, Goodman said, but financial conflicts of interest keep servicers from reducing principal. Mortgage servicing firms make money off servicing fees, which are based on the principal amount -- a disincentive for reducing principal, Goodman said. Servicers are often owned by large financial institutions that hold second liens. If principal reduction is left up to the banks' discretion, she said, the conflicting financial interests will likely restrict principal reduction, she said. Michael Krimminger, special advisor for policy at the office of the chairman for the Federal Deposit Insurance Corp. (FDIC), in prepared testimony (available to download here) said "lenders and servicers must be flexible to address new challenges" including deeply underwater loans, which would require greater use of principal forbearance. He said FDIC strongly recommended servicers adopt forbearance programs for unemployed borrowers. Treasury Department Assistant Secretary for Financial Stability Herbert Allison said the Treasury is pushing a mortgage modification conversion drive to step up the rate of permanent HAMP modifications. The drive emphasizes servicer accountability, Web resources for borrowers and engagement of state, local and community stakeholders, according to his opening testimony (available to download here). Allison said not all homeowners can afford even 31% of their income -- the basic yardstick for measuring affordability -- for a HAMP modification. As a result, the Treasury pursued a foreclosure alternative incentive program to stabilize the effect of these circumstances on the housing market. Douglas Roeder, senior deputy comptroller of large bank supervision at the Office of the Comptroller of the Currency, echoed comptroller John Dugan's call for financial regulators to establish minimum underwriting standards for all mortgages and thereby avoid another foreclosure crisis. Roeder said in prepared testimony (available to download here) changes in the origination process should focus on requiring financial documents from borrowers to verify income. He also called for "meaningful down payments" to ensure borrowers' maintain "skin in the game," as well as borrower qualification based on the fully indexed rate under the loan structure, rather than the perhaps lower introductory rate. "We believe that such national standards would significantly improve the confidence in housing markets and help prevent a recurrence of the housing risks we saw over the past few years," he said. "In this regard, it will be critical to implement and enforce such standards uniformly across all lenders, ensuring that the far more lax standards of unregulated mortgage originators are raised to the same level as banks and thrifts." Write to Diana Golobay.