The fires which impacted much of California in late October were terrible to watch. Nearly 900,000 people were asked to leave their homes, evidence of a Katrina-like disaster.
There was little loss of life, something for which everyone should be grateful. State and local authorities did an exceptional job. Still, it appears that more than 1,700 homes were destroyed and thousands damaged. Financial and personal losses were enormous.
Loan modifications are just about impossible, say lenders — except when there’s a fire, flood or tornado. Then loans are suddenly as flexible as taffy. Lenders in such situations magically discover an immediate ability to revise loan terms, defer payments, postpone foreclosures, forgive late fees and end negative reports to credit bureaus.
For its part, the lending industry says it’s great at disaster relief.
“The truth is,” says John Robbins, former chairman of the Mortgage Bankers Association, “we’re good at cleaning up. We had a lot of practice after what Katrina and Rita did to the Gulf Coast. We prevented widespread foreclosures for more than 18 months by providing forbearance for many homeowners.”
In fact, there’s actually a National Housing Locator System for disaster victims — a system, says HUD, designed “to deliver housing assistance by rapidly locating rental housing and available government-owned single family homes for sale during an emergency.”
But instead of fires and floods, we now face a national financial disaster of massive proportions caused by toxic loan products and reduced underwriting standards.
According to a report by the Congressional Joint Economic Committee, 2 million homes will be lost to foreclosure during the next two years and more than $100 billion in housing wealth will disappear.
Huge numbers of foreclosures will force down home values nationwide. A 10 percent decline in housing prices, says the Committee, could lead to economic losses worth $2.3 trillion.
Why are the actions that are so right when homes burn in California or flood along the Gulf Coast so wrong when loans reset? What, exactly, is the practical difference between a home lost to fire and a home lost to toxic financing? Are not the losses in either case substantial?
A survey from Moody’s Investor Service tells us that few loans are now being modified.
“Despite much industry dialog and heavy press attention on the topic of loan modifications as a mitigation technique to avoid foreclosure and reduce losses on defaulted loans, the survey results suggest that on average subprime servicers have only recently begun to materially increase the number of modifications as it relates to interest rate resets. Specifically, the survey showed that most servicers had only modified approximately 1 percent of their serviced loans that experienced a reset in the months of January, April and July 2007.”
Seventeen hundred lost homes is a big number. Here’s a bigger number: According to RealtyTrac, in September 51,259 foreclosure actions were filed against California homeowners, up 246 percent from a year earlier.
“State by state, the economic costs from the subprime debacle are shockingly high,” says Senator Charles E. Schumer, D-N.Y. “From New York to California, we are headed for billions in lost wealth, property values, and tax revenues. The current tidal wave of foreclosures will soon turn into a tsunami of losses and debt for families and communities.”
“Lenders have shown that they are entirely capable of dealing with large numbers of troubled loans in times of crisis and disaster,” says Jim Saccacio, chairman and CEO at RealtyTrac.com, the largest marketplace for foreclosure properties. “The need now is to institute such programs on a national basis, to recognize that the mortgage meltdown is both substantial and worthy of the same concern that lenders display when visible disasters lead the nightly news.”
One approach might be mass modifications.
“Renegotiating terms loan by loan is too costly and time consuming,” says Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, writing in The New York Times.
“Subprime servicers should take a more standardized approach: restructure all 2/28 and 3/27 subprime hybrid loans for owner-occupied homes in cases where the borrower has been making timely payments but can’t afford the reset payments. Convert these to fixed-rate loans at the starter rate.”
Bair’s idea is innovative, but it would impact mortgage investors more than any other group. By the time the matter got untangled in court, millions of additional homes would be lost to foreclosure.
Is there a solution? There certainly is not an answer which will save every deserving borrower, but there is a way to keep investors whole while saving a large number of homes.
How? Take three steps: First, require lenders to offer every ARM borrower the opportunity to refinance into the FHASecure program. Second, ban the imposition of prepayment penalties for those who refinance ARMs. Third, limit fees and points to a statutory maximum to assure that refinancing borrowers are not overcharged.
An opportunity to refinance is not the same as a commitment to refinance. The FHA program requires income verification, full-blown appraisals and stuffy paperwork. Borrowers who lied about their income on their original loan applications or who lack sufficient equity will not qualify.
Many borrowers, however, can qualify under the FHASecure program because they will be moving from expensive subprime loans to a less-costly government-insured program. Monthly expenses for many borrowers will decline, thereby making homes more affordable and reducing foreclosure levels. Meanwhile, many troubled loans will be paid off in full by refinancing. That should please investors who otherwise would be looking at losses on the order of $40,000 for every mortgage that fails.
Columnist Peter G. Miller is the author of The Common-Sense Mortgage and is syndicated in more than 100 newspapers.