Lawmakers, regulators and industry veterans continue to wrap their minds around the 31% debt-to-income ratio targeted in many federal mortgage workout plans. The ideal 31% ratio can be achieved through various methods, including principal reduction or substantial interest rate cuts.
Conflicts of interest arise with either option -- servicers on one side unwilling to reduce principal and investors on the other side fearing cashflow restrictions initially and fallout whenever interest rates begin heading back up -- which is most likely why workout efforts are slow to get off the ground.
It doesn't necessarily mean the industry is stalling completely on loss mitigation, but nowhere is the misconception that servicers, lenders and investors are out to get disadvantaged borrowers more rampant than, perhaps, among politicians.
At a House Financial Services Committee hearing Tuesday, Neighborhood Assistance Corp. of America (NACA)'s Bruce Marks testified in favor principal reductions at the market's current interest rate. Other witnesses at the hearing argued against a reduction in the interest rate, which would merely put off default.
In the course of reporting on the ongoing hearing, HousingWire grew increasingly aware of the ongoing blame game among the members of the Committee that, from their remarks, seemed unsympathetic of the profoundly complex financial system and the operational conflicts that sometimes make modification of a first lien impossible where the servicer is ultimately owned by the large lender that holds the second lien.
But whether it's a genuine misunderstanding of the technical roadblocks along the way to modification or an outright ignorance of responsibility all levels of the system -- consumer, lender, servicer, investor -- must take for the fallout seen today, a few comments seemed immediatly worthy of mention.
One particularly interesting exchange between Anthony Sanders, professor of real estate finance at George Mason University, and Rep. Joe Baca (D-CA), played out like this:
Sanders: "I'm hoping everyone considers that if we do move to 2% loans for a large segment of the population in financial difficulty -- which is very noble-sounding -- somebody is going to be holding those notes, and when inflation and high interest rates go 'kaboom' in a few years, which they will, whoever is sitting on that paper is going to have catastrophic losses. Right now it's the Fed that's sitting on them. But Fannie and Freddie are insuring this. We have to be careful of the long-run implications of what we're doing here."
Baca: "But the people holding those notes really have been the greedy ones that took advantage of those individuals, right? If those are the ones holding the notes, I don't mind making them lose because they got greedy in the first place."
Sanders: "Well, if pension funds and the Federal Reserve are the greedy ones -- I don't think so. This is going to hurt a lot of people. It's not just what you call the greedy folks. It's folks around the world that are going to suffer when we have inflation and interest rates go up."
In the December issue of HousingWire magazine, we dive into the broad financial support of the mortgage market by the US taxpayer. With the Federal Reserve investing $1.25trn of taxpayer funds in agency mortgage-backed securities (MBS) by the end of Q110, the taxpayer becomes the largest single holder of mortgage-related notes.
Write to Diana Golobay.