Gagan Sharma is president and CEO of BSI Financial
, an outsourcing provider specializing in mortgage subservicing, default management, loss mitigation, due diligence, REO and quality control services to over 240 lenders and investors. Sharma sat down for this episode of In This Corner
to discuss whether the 116,000 permanent HAMP modifications
is a recovery mirage or a viable solution.
HAMP (Home Affordable Modification Program) has been in effect nearly a year. Why have so few distressed mortgages been modified so far?
Remember you have as many as seven million mortgages eligible to be modified. That is the total number of potential loans in the delinquency bucket. That number is far more than the number that can really be modified. I heard a senior Treasury Department official say recently that modifications are only for a certain subset
of distressed homeowners and we agree. That number is probably around 1.5 million. So far 600,000 to 800,000 trial modifications have been done. I don’t think you’ll see 1.5 million modifications done under HAMP and the re-default rate on those will be significant for two main reasons. One, there are so many people with negative equity and the other is the weak job market. If the borrower couldn’t afford the payment before and you reduce it by 10%, they’re not likely to afford that either. There’s no point in putting people in a modification if they simply can’t afford it.
The basic question is: What is the true affordability of the mortgage given the person’s income and the size of the mortgage? Many loans are simply too far gone to help the borrowers. Modification is one of the tools in the toolbox, but it is not the answer for every situation.
Is modification the only or even preferred way to help borrowers? Under what circumstances will owners of the mortgages be willing to forgive some level of the principal balance?
A lot of it depends on who owns the mortgage. The reason you see many private investors unwilling to participate in HAMP is due to the mandatory interest rate reductions and ceilings. A rate of 2% is not an attractive investment for most. If, however, they bought the loan at 40-to-50 cents on the dollar, they are likely to be more willing to reduce the principal balance.
For their part, banks are happier with HAMP because reducing the interest rate is more acceptable to them. Between savings and checking accounts and borrowing at the federal rate, their cost of funds is close to zero, so even if they reduced the interest rate on the mortgage to 2% they can still earn a positive spread. For them, reduction of the interest rate to reduce the monthly payment has a higher success rate. For example, we’ve heard Wells Fargo has had some success with its option ARMs. But the banks are less willing to reduce the principal balance. If they did, they would have to recognize the loss immediately, and many of them don’t want to do that.
There also has to be a happy medium between the borrower and the lender. You have to give the borrower an incentive to keep paying, but is that fair to the bank or investor? And does that create a moral hazard for borrowers who are current on their loans not to pay?
Is the new Home Affordable Foreclosure Alternatives a desirable alternative?
Yes, the new HAFA alternatives to foreclosures – short sales and deeds-in-lieu of foreclosure – are the way to go. There’s a difference between keeping the borrower in the home and preventing foreclosure. You need to incent the borrower to keep up the property. Let them live in the house and maintain the property for six months and then they can choose to leave with a clean credit record. There is no foreclosure risk that way. Short sales and deeds-in-lieu of foreclosure also move the process along faster. The property goes on the market sooner and is in better condition than if it had been abandoned by the homeowner, which means better prices for the house once it goes back on the market. It’s a win-win for everybody.
How long will it take before mortgage foreclosures start to recede and the market returns to some level of normalcy?
There is a “shadow inventory” of 5-to-7m homes on the market. It will take a while to flush all of those homes through the system. The best case scenario is one-to-three years, but probably more than one year.
What differentiates servicers in this environment?
The big servicers operate in silos. They have a department for servicing current loans, one for handling modifications, one for foreclosures, etc. The borrower doesn’t know who he’s speaking to when he calls and gets transferred around from one department to another. Smaller servicers focused on this challenge can offer a single point-of-contact, and the borrower knows who he’s dealing with. That gives the borrower a comfort level the big servicers can’t offer. This is crucial in today’s environment because servicing must be done in a cooperative manner. From the servicer’s perspective, the borrower who wants to communicate is worth a lot. If the borrower is actively engaged in dialogue with the servicer, there is a way to turn that conversation into something productive rather than simply moving straight to foreclosure, which nobody wants. The investors we work with want to work quickly, and we have had a lot of success doing that. They can respond to a short sale request in as little as 24 hours. A big servicer might take four to six weeks to respond to such a request.