There is a popular proverb that goes something like this: ‘A lean agreement is better than a fat judgment.’ The proverb's origin is less than clear, and in some instances, the word ‘lawsuit’ replaces ‘judgment;’ in others, ‘bad’ substitutes for ‘lean.’ Wording aside, the sentiment is clear.
Policy-makers and investors may want to keep the proverb in mind when they meet on Capitol Hill to argue about – err, discuss – the latest bad-loan workout drama. This particular conflict centers on the Federal Housing Administration's (FHA) much talked about HOPE for Homeowners (H4H) program, which was rolled out at the beginning of this month.
Last week, the New York Times reported that two hedge funds, Braddock Financial Corp. and Greenwich Financial Services, sent letters to servicers threatening litigation should the servicers participate in H4H. The House Committee on Financial Services, in turn, requested that Braddock and Greenwich execs appear at a Nov. 12 hearing on the matter.
In its letter to the funds, the committee expressed "outrage" at the notion that they would "[instruct] the servicers of their mortgages to defy this national program [and insist] on further socially and economically damaging foreclosures."
Isn't this what we've all been waiting for? With banks, vendors and the agencies churning out new loss mitigation programs and tools daily, it is a wonder that it has taken as long as it has for the rubber to meet the road. Servicers – with a fiduciary responsibility to investors and the expectation that they'll abide by the rules of their servicing agreements – have been left in a tough position.
There's pressure from both sides: The government wants fewer foreclosures and more workouts; the investors want their servicing agreements followed to the T. What's a servicer to do?
Well, first, let's take a quick look at the program itself.
H4H was a piece of the Housing and Economic Recovery Act of 2008 that was signed into law in the summer, and in many ways, it embodies the FHA's ongoing modernization efforts. In short, the program allows eligible borrowers to refinance into a 30-year fixed-rate FHA loan, extinguishes existing liens and features equity- and appreciation-sharing components. Unlike its FHA predecessor, FHASecure (due to expire Dec. 31), H4H covers any mortgage product. It is also limited to one-unit properties and comes with higher premiums and interest rates than FHASecure.
If you had the opportunity to be in San Francisco last week for the Mortgage Bankers Association's annual show and sit in on one of the servicing-oriented panel sessions, you know what a hot topic H4H has become. More than one session-ending Q&A featured inquiries about the FHA's latest invention. What happens to subordinate liens? Is the program suitable for all borrowers? Does equity sharing set up some borrowers for a loss?
Oh, and will investors sign on?
During one panel session, Brian Montgomery of the U.S. Department of Housing & Urban Development conceded that H4H is a "complicated program." He's not alone in thinking that.
While the FHA should be applauded for trying something new, isn't there something to be said for fine-tuning a program's details before it's implemented? I understand that policy-makers probably felt a need for urgency in rolling out H4H – we're all in favor of stemming the growing foreclosure problem as soon as possible.
But should servicers, who are already handling ridiculous workloads, be pulled further by the tug of war that's happening between Wall Street and Washington? I don't question whether servicers are up to the task of successfully playing their parts in managing our current crisis; I'm just unsure if Stretch Armstrong-like elasticity is a fair expectation.
How the Braddock/Greenwich versus House Committee on Financial Services heavyweight bout will play out remains to be seen, but it's certainly an important news item for servicers to keep an eye on.
Will the hedge funds relent and agree that H4H may be a better fiscal option for them than foreclosure? Or will Barney Frank and Co. be convinced that the program needs retooling because it puts investors at a disadvantage? Regardless, can we please leave the lawsuits against servicers out of this mess? I'm pretty sure they have better things to do.