Frank: Mortgage Bailout Shouldn’t Offer ‘Free Rides’

Reducing the amount of foreclosures will play a key role in stabilizing the financial crisis, but the government should avoid giving a “free ride” to any borrower who could not have afforded a mortgage to begin with, said Barney Frank, D-Mass., chairman of the House Committee on Financial Services, at a hearing Wednesday. While the foreclosure situation might necessitate legislation, “there is, in my judgment, zero likelihood that taxpayer dollars will go to those who should never have had loans in the first place,” Frank said, according to a CNN article. In the hearing on private sector cooperation in mortgage modifications, the committee considered testimony from several executive players in the industry: Benjamin Allensworth, a senior legal counsel with Managed Funds Association; Thomas Deutsch, deputy executive director with American Securitization Forum; Michael Gross, managing director of loan administration loss mitigation with Bank of America Corp. (BAC); and Molly Sheehan, senior vice president of the home lending division of JP Morgan Chase & Co. (JPM). BofA’s Gross told the committee in his testimony of the various ways the bank is working to prevent foreclosures and help troubled borrowers, including mortgage modification available under Hope for Homeowners, interest rate and principal reductions and a proactive outreach program through which bank representatives make a variety of efforts to contact delinquent homeowners at risk for foreclosure and educate them on their options. The program’s foreclosure alternatives are designed to benefit both the borrower and the investor, since no one benefits from a foreclosed home, Gross said. He urged the committee to consider revising the authority provided by Hope for Homeowners through increased minimum loan-to-value and debt-to-income requirements. Even with revisions, some impediments to loan modification still exist, Gross said. Of the main impediments are a lack of uniformity in investor rules and underlying servicing contracts that prevent BofA from doing modifications, he said. Lack of uniformity in approaches to loan modifications also present a problem, which might be eased by the streamlined loan modification plan announced Monday by the GSEs and HOPE NOW. The only impediment that can’t be directly aided by government intervention is the effect of changed borrower circumstances — like unemployment, divorce or dissatisfaction with the property — that make a loan modification unattainable, Gross said. “We can only modify loans where the borrower has the ability and willingness to repay,” he said. “Our studies show such ‘unresolvable’ borrower issues represent the largest impediments to modifications, and this could worsen without economic growth and housing market stability.” The unavailability of mortgage credit for refinancing opportunities, declining home values, high levels of non-mortgage credit outstanding — like credit card, auto loan and other debt — the prevalence of second liens and rising unemployment levels and reductions in income all work together to make mortgage payments unaffordable and drive rising delinquencies and foreclosures, according to the testimony of American Securitization Forum’s Deutsch. “While critically important and increasingly employed, industry-led loss mitigation initiatives, including loan modifications, are not a panacea for declining home prices, mortgage defaults and foreclosures,” he said. Modifications also fail to address deeper issues like lack of borrower desire to stay in the property or inability to afford payments even with significant interest or principal reductions. “These borrowers face challenges in meeting debt obligations that extend well beyond their mortgage,” he said. “This may help to explain why some 30 to 50 percent of mortgage payment defaults proceed to foreclosure with no borrower response to servicer outreach via phone calls and mailings — even where some of those borrowers might otherwise qualify for a modification.” “It is important that we in Congress do not underestimate this [foreclosure] problem,” said Congresswoman Ginny Brown-Waite, R-Fla., in her opening statement. “However, it is equally important that we do not rush in haste to enact well-intentioned legislation that has unintended consequences far into the future.” Such a legislation, she said, was the Emergency Economic Stabilization Act and the $700 billion in rescue funds it provided, which Brown-Waite voted against because of the unlikelihood Wall Street would use the funds to help troubled homeowners. While government intervention in reforming the process might be necessary, she cautioned against the aggressive federal action to modify loans during the Great Depression that raised interest rates and eventually reduced new loans. “Thus, moving forward, I encourage the private sector to pursue efforts to mitigate the foreclosure crisis, and I urge my colleagues to consider the unintended consequences of well-intentioned action,” Brown-Waite said. Read the testimonies. Write to Diana Golobay at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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