In an op-ed letter published by American Banker, NeighborWorks America CEO Kenneth Wade says that greater investor flexibility is needed to help lessen the impact of a second wave of coming foreclosures:
Progress is being made, and even though the number of foreclosures will continue to rise — peaking in the middle of next year — most of the industry appears to be united in addressing the problem … We believe that those default rates could be reduced if investors increased their flexibility when it comes to working out troubled home loans that are the collateral for these mortgage-backed securities … Investors have to expand the opportunities for servicers to offer loan modifications to distressed borrowers. This year a Moody’s Investors Service executive made the same point in testimony before Congress. In a press release, Warren Kornfeld, a managing director at the agency, said Moody’s believes loan modifications are an important tool to mitigate losses. “Loan modifications, when used judiciously, can mitigate losses on mortgage loans and increase the likelihood that bonds will be paid,” Mr. Kornfeld said. “So, while loan modifications cannot eliminate losses or generate more credit enhancement for a transaction, we believe that they can typically have positive credit implications for securities backed by subprime mortgage loans.”
Subscribers to American Banker can read the full letter. In my previous job as a trade journalist, I interviewed the head of loss mitigation at Litton Loan Servicing (roughly a year and a half ago): at that time, the servicer was already anticipating the wave of borrower defaults we’re now starting to see, and cited modifying investor guidelines as the company’s single largest focus in order to ensure that loss mitigation efforts would be successful. Given that the discussion over loan modifications and investor guidelines seems to have gained in intensity and exposure since that time, I can only surmise that it’s been difficult for servicers to get the neccessary changes made that will allow them to perform loan modifications for borrowers who need it. I’m also willing to guess that more investors than before are willing to consider making changes, after what’s taken place in the past few months. Unless, of course, that investor happens to be in a short position and sees loan modifications as a threat to investor returns.
