Fannie, Freddie and 'Streamlined Mortgage Modifications'

The “Streamlined Mortgage Modification Plan” or SMP was announced with great fanfare at 2:00 PM Tuesday. Fannie Mae (FNM), Freddie Mac (FRE) and HOPE NOW, along with the Treasury and Federal Housing Finance Agency (FHFA), devised a free market plan to help only those homeowners whose mortgages are guaranteed toxic. In compliance with the Bush Administration doctrine – assist no homeowner who can make his payments or can be foreclosed profitably.

SMP targets the most HOPELESS mortgages: Loan to values (LTV) greater than 90% with no upper limit and at least 90 days delinquent without bankruptcy. The program is limited to single family owner-occupied homes. Mortgages must be held (owned) by Fannie, Freddie or portfolio lenders. Securitized mortgages are not included. The goal is to reduce interest rates, extend loan terms up to 40 years, and as a last resort reduce principal so that total housing payments (mortgage, taxes, insurance and HOA/condo fees) won’t exceed 38% of the borrower’s income. Fannie and Freddie will pay servicers $800 to perform a mortgage modification. Borrowers must file a hardship statement to apply.

The trouble is the Administration is not forcing mortgage lenders to capitulate. It is still a negotiation where lenders are trying to retain as many full-paying homeowners as possible, no matter how onerous the original terms. The parties agreed to only modify mortgages they had absolutely no hope of collecting, for which foreclosed recoveries would be miniscule. Other than steering Fannie and Freddie, this free market Administration has been unwilling to force any lender or mortgage investor to do anything. It was the courts that forced Bank of America (BAC) to modify Countrywide’s mortgages. I wonder if the JP Morgan (JPM) and Citigroup (C) announced modifications are in their self-interest or in fear of actions the Obama Administration might take.

I don’t question that the SMP is the most cost effective way of dealing with the GSEs' most toxic mortgages. And under conservatorship they have the time to wait for the mortgages to mature. But we still need the legislation and the courts to cleanse the mortgage market as a whole. Bankruptcy judgments, as the Democrats want, is one answer. Another might be arbitration, or a rules-based system of modifications that can be applied to securitizations. Waiting for mortgages to become toxic has certainly not proved beneficial.

Servicers are supposed to determine whether a modification or foreclosure would present the highest net current value to the mortgage owner. However, servicer interest and governing documents for securitizations gum the process. It is only through process of independent arbitration, on a massive scale, that America can move beyond the mortgage crisis. The Bush Administration refuses to recognize this.

We should not lose sight of the fact that we have a mortgage crisis, not a housing crisis. Falling home prices are not a bad thing. Failure to adapt is. Toll Brothers’ (TOL) CEO Robert Toll refused to recognize that aspirational buyers could no longer afford his product in today’s conference call.

Note: The Bush Administration still refuses to implement Congressman Barney Frank’s $300B plan for FHA to guarantee mortgages refinanced to 85% of current appraised value. This program passed as part of the TARP legislation and was supposed to be implemented by October 1, 2008.

Disclosure: Author is long BAC, C, FNM and FRE.

Comments

[Ishortyou:]

well at least something is been done...

2008 Nov 12 07:43 AM

[athought:]

Since govt encouragement of subprime caused all of this, then this encouragement must cease.

2008 Dec 07 02:51 PM