In speaking to the Committee on Banking, Housing and Urban Affairs yesterday, FDIC Chairman Sheila Bair addressed the issue of streamlined loan modification and called on servicers to do more than just set up repayment plans.
Since July of last year, 1,035,000 homeowners received loan workouts through Hope Now, but an overwhelming 758,000 of those were simple repayment plans, while just 278,000 were full scale loan modifications.
Bair and many others are concerned that repayment plans will simply delay a growing problem, and lead to a larger number of delinquencies in the not-so-distant future.
“In spite of some encouraging signs that servicers are increasing the pace of loan modifications, some reports continue to show a great reliance by servicers on repayment plans,” Bair said.
“Repayment plans or brief deferrals of payments will not allow us to get past our current problems. They are analogous to “kicking the can down the road”.”
“Servicers should quickly identify loans facing likely default, develop broad templates for restructuring these loans into long-term, sustainable loans with fixed rates for at least five years, and proactively initiate that process,” she said.
“In addition, in appropriate circumstances, lenders and servicers also should consider forgiving a portion of the principal balance owed.”
Bair noted that servicers should consider situations where borrowers can’t support repayment of the loan, but reducing the principal balance to a sustainable level would be more advantageous than the anticipated loss that would result from a foreclosure.
“Investors should be pushing for these types of modifications. Given current market conditions, servicers who take no action and choose to rely on the traditional loan-by-loan process leading to foreclosure could run a risk of legal liability to investors for their failure to take steps to limit losses to the loan pool as a whole.”
Bair also called for more in-depth reporting from loan servicers to document efforts and better assess the situation.
“In addition, we need more consistent, transparent reporting of loan modification activity,” said Bair. “Just this week, the FDIC and other federal regulators are issuing a statement calling for all servicers and lenders to provide more detailed reporting on their efforts through the Hope Now Alliance.”
“Some servicers continue to express concern about potential legal liability to investors for loan modification activity. We believe that servicers have significant flexibility to restructure loans under current law. Indeed, as previously indicated, there may be litigation risk in failing to modify troubled mortgages.”
“However, to address these concerns, Congress could explicitly affirm that servicers have such legal authority and establish litigation safe harbors for responsible, systematic modifications.”