House Committee to Servicers: Forbear
House Financial Services Committee chairman Barney Frank (D-MA), along with other committee members, sent a letter on Tuesday afternoon to senior servicing executives looking to persuade them to engage in forbearances with troubled borrowers, until the so-called Hope for Homeowners program tied to a recently passed housing bill takes effect on October 1. Read full letter. The letter's contents underscore the confusion that now tends to exist among lawmakers regarding servicers' effectiveness (and, indeed, even their role); on one hand, they are hearing about progress being made from industry groups like HOPE NOW -- and, to a certain extent, progress is being made -- while on the other hand, consumer groups continue to lobby members of Congress with stories that accuse servicers of predatory practices. "Many mortgage servicers and others in the servicing industry have told us about the progress they are making (and expect to make) to address the foreclosure crisis," Frank wrote in the letter. "Unfortunately, individuals facing foreclosure, consumer advocates and others have painted a very different picture: one that involves long waits and few, if any, meaningful loan modifications." Read an earlier HW viewpoint on why this gap in perception exists. The Hope for Homeowners program is a $300 billion expansion of the Federal Housing Administration's authority to underwrite refinanced mortgages for troubled borrowers; under the program, original note holders must agree to write down principal to 90 percent of a current appraisal, in addition to paying various fees. Borrowers also must pay a fee equal to 150 basis points annually. Frank asked servicers to forbear for borrowers that would qualify under the program, and asked servicers to report back on whether they intended to write down principal amounts as required to participate in the voluntary program. "The general view has been that principal write downs have been a 'last option' for servicers because they represent an immediate loss for investors but (even if meaningful) leave investors and servicers with ongoing credit risk," Frank said. The Hope for Homeowners passes that credit risk onto the government, with the idea being that investors would become more amenable to a write-down in such a circumstance. Frank said the program "eliminates the risk of future loss" for investors, in his letter. He also asked servicers to report on whether they will allow re-modifications for borrowers party to a previous modification, to allow them to see their loan pushed into the new FHA program once it is made available. The House committee will hold a follow up hearing in the middle of September, in which lawmakers intend to "gauge compliance" with their demands; Frank has threatened previously that a failure to forebear ahead of the new FHA program's expected launch on October would be grounds for more restrictive legislation governing the loan servicing industry. Fellow committee member Maxine Waters (D-CA) has already introduced legislation in the committee designed to regulate mortgage servicing. Servicers receiving the letter included units of major financial institutions, including HSBC Finance Corp., JP Morgan Chase & Co. (JPM), Washington Mutual (WM), Bank of America (BAC), Citigroup (C); third-party servicing shops including Ocwen Financial (OCN) and Litton Loan Servicing were also on the distribution list, as were both Fannie Mae (FNM) and Freddie Mac (FRE). Disclosure: The author was long FRE, and held various put option contracts on WM, 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.