REQUIRED READING: The latest round of loss mitigation programs – coming from 17 states using a combined $2 billion in federal funds – includes new strategies for dealing with troubled borrowers, such as giving homeowners cash to make their mortgage payments during extended periods of unemployment. But some of the new state programs include a catch that is rather ironic, given the name of the overarching program: Hardest Hit.
In some cases, for the borrower to get the cash, the servicer has to agree to take a principal-reduction hit.
Are the Hardest Hit programs great new tools for servicers? Or, are they just more government loss mitigation programs with too much red tape and too many reporting requirements? The answer may depend upon where you service loans and for whom.
Michigan was one of the first states to launch a Hardest Hit program with funding from the U.S. Department of the Treasury through the existing Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets. The Michigan program targets homeowners who are at risk of foreclosure and have experienced a substantial reduction in income due to involuntary unemployment, underemployment or a medical condition.
The designers of Michigan's $280 million Hardest Hit program are all former lenders, servicers or originators. Theirs is a product that lenders can drop into the current process flow, rather than yet another stand-alone loss mitigation product.
"The industry doesn't need something totally out of the box," says Mary Townley, director of the Michigan State Housing Development Authority's Homeownership Division. "They're already dealing with HAMP, HAFA, HAMUP, and the other programs that are out there."
The Michigan program offers a choice of three options servicers can use before, after or at the same time as other loss mitigation programs:
- mortgage payment assistance for homeowners currently receiving unemployment compensation,
- rescue funds for homeowners who have fallen behind in their mortgage payments due to no fault of their own and who have overcome this obstacle, and
- federal matching funds for principal reductions for homeowners who can no longer afford their mortgage payments as a result of reduced income.
Community servicers on board
Servicer response to the Michigan plan has been mixed. "We're seeing loans from community banks, credit unions and midsize banks," Townley says. "We have yet to sign up the larger lenders – Bank of America, Chase, Citi. Their footprints are bigger, and their loan modification [organizations] may not be local. Their training is larger, and the implementation plan has to be larger."
The differences in large- and small-servicer uptake on the Hardest Hit programs reflect the interests of the stakeholders that typically own the credit risk on the loans, points out Steven Horne, president of Wingspan Portfolio Advisors.
"A lot of the smaller servicers are either working on behalf of portfolio investors who own the whole loans, or distressed debt buyers who've purchased portfolios of nonperforming loans," he says. "They have all the incentive to be patient and generous in working with borrowers, as well as the incentive to use the most efficient strategies to create the most value for the stakeholder."
Larger servicers must deal with restrictions and real or perceived liability affecting securitized loans. "When you're servicing millions of loans and you have no stake in the profits of those loans, servicing is an expense, and every dollar you invest [is reflected in] the bottom line," Horne adds.
Townley believes the large servicers will eventually get on board with the program, saying, "I understand the obstacles they face, but I'm not going to give up."
With lenders selling 90% of their products to government-sponsored enterprises (GSEs), the success of Hardest Hit will also depend upon the reaction from Fannie Mae and Freddie Mac. "The GSEs haven't given their stamp of approval, but we're in talks about it," Townley says.
Fannie Mae and Freddie Mac officials say it is too early to talk about the programs.
Still, the mortgage subsidy program should appeal to the GSEs and other investors. "The investor is being paid monthly, so there shouldn't be any large concern about that," Townley says. "Some states are not requiring a servicer participation agreement. They're just assisting the borrower and sending a payment to the servicer every month."
The most controversial component of Michigan's and other states' Hardest Hit programs is principal curtailments. "In Michigan, we created that program, thinking it would only be used by credit unions and community banks that hold loans in their portfolio, and that's exactly what we're seeing," Townley says. "We didn't feel that any of the large lenders in the state that have sold the assets would utilize it."
In California, the Hardest Hit program splits $700 million among four programs, including a dollar-for-dollar principal curtailment matching fund. "If we come in with a $50,000 principal reduction, then we'll ask for a $50,000 reduction from the servicer," says Linn Warren, single-family portfolio manager for the California Housing Finance Agency.
That principal-matching program can help when borrowers fail the net-present-valueÂ (NPV) test included in the Home Affordable Modification Program (HAMP). "If you have a borrower who fails the HAMP NPV test, you could avail yourself of the Hardest Hit principal cash, matched by the investor, to make the borrower's NPV positive. We want you to look at that and see if it makes economic sense if you use the matching program."
Lenders that have been doing principal write-downs successfully – especially those that found it effective for dealing with troubled option adjustable-rate mortgages in California – will sign on when states offer to match the write-down dollar-for-dollar, says Edward Pinto, a housing finance industry analyst and former chief credit officer for Fannie Mae.
"Will it get lenders that weren't already doing principal curtailments to do it? Probably not," he adds. "This won't get them over the hump."
Another group Pinto says is likely to step up for the Hardest Hit curtailment option: investors that bought loans at a discount and are restructuring and refinancing borrowers into Federal Housing Administration loans.
"The ability to forgive principal is a very powerful tool," Horne says. "It doesn't always have to be used, but it can be utilized much more than it has been, whether you're looking at a modification that's likely to perform or facilitating a short refinance to set up the borrower for success."
Another way of looking at principal forgiveness is to consider the billions of dollars in principal being forgiven every day. "Is it being forgiven prior to the foreclosure or after the foreclosure is complete?" Horne asks. "Program after program gets proposed, but then we say, "We could do those, but we'd have to recognize a loss.' The losses are there; we just don't want to recognize them."
In states such as California, the Hardest Hit program will couple payments from the state with forbearance for unemployed borrowers. "We're contemplating offering up to six months of mortgage payments with a maximum of $3,000 a month or 100% of the borrower's mortgage payment – whichever is less," Warren says. "Along with this, we'd be requiring that lenders forbear for an additional three months. If we're going to put in this amount of money and the borrower is still unemployed, we want the servicer to contribute three additional months of forbearance."
How long is long enough for servicers to forbear and for the state to cover an unemployed borrower's mortgage? "We all acknowledge that unemployment is one of the primary causes of default," Warren says. "What's not as clear is how much subsidy is needed to keep the borrower solvent until they're re-employed."
Prior programs have involved forbearance rather than subsidies, so there is little historical data that can be used to predict the current program's likelihood of success. In Fannie Mae's now-defunct HomeSaver Advance, over three-quarters of the borrowers redefaulted.
"They wrote off those loans because they didn't work," Pinto says. "Hardest Hit is going down the same road. The HomeSaver Advance borrowers were unemployed, and the problem is, they continue to try to keep people in homes that, in the long term, they are going to have a hard time keeping their home. They'd be better off figuring out how to de-leverage the market, instead of keeping the leverage the same or increasing it."
What California officials do know is that the current process for helping unemployed borrowers is not working well. "You're evaluated under HAMP and HAFA at a given point in time, and if you're on unemployment insurance, it isn't enough to qualify," Linn says. "This is buying enough time to get the borrowers on their feet and get a modification under HAMP. You need to give the borrowers breathing room to stabilize themselves. Then, if a borrower is still unable to find employment, then you're going to transition them out of homeownership."
Servicers have asked California to consider offering servicers financial support when the forbearance does not work out. "I can understand why a servicer would want to hedge their financial risk, but we haven't decided on that," Warren says. "Financially, even with the matching requirements on servicers, we believe it's a financial win and a financial gain, even though they're being asked to write off principal."
In Michigan, the unemployment division has estimated that the average worker in the state is unemployed for 24 weeks.
"So we've provided an unemployment subsidy for 12 months," Townley says. "If they go back to work before that, we'll carry them for two months past their back-to-work date to carry them through the challenges [of regaining financial stability]."
Maintaining cashflow during a borrower's unemployment will solve the problem for borrowers who eventually do find another job, but the question remains about the fate of borrowers who become underemployed or situations in which only one member of a couple can find work, says Bill Garland, a senior vice president at technology provider ISGN.
"We have a lot of factors we haven't dealt with in previous downturns," he says. "The one that's got me concerned is the high level of unemployment and the inability of borrowers to come up with equitable employment."
Although maintaining cashflow to servicers through government programs helps, it does not address the question of what to do about borrowers whose next job doesn't pay enough to cover the mortgage. "I haven't seen statistics on underemployment, but I think it could be affecting as much as 40 percent of borrowers," Garland adds. "The incidence of one wage earner in a household losing their job is prevalent, and changes in the job market may negate the ability to replace that job at the previous income level."
In the final analysis, only time will tell whether servicers will make use of the Hardest Hit program.
"Borrowers and investors have to make a decision on individual borrowers," says Warren. "These are voluntary programs."
Dona DeZube is a freelance writer based in Clarksville, Md.