Viewpoint: Foreclosure Moratoriums, and Interpreting the Truth

If you read the headlines, you’d think Citigroup is putting a moratorium on most foreclosures nationwide. The Associated Press ran the following lede on its national coverage Tuesday morning: “Citigroup says it is imposing a moratorium on most foreclosures as part of a series of initiatives aimed at helping at-risk borrowers remain in their homes…” There’s just one problem: that’s not what Citigroup really said. So let’s focus on what Citigroup actually did say Tuesday morning, from its press statement: “Citi will systematically implement its practice of not initiating a foreclosure or completing a foreclosure sale on any eligible borrower where Citi owns the mortgage, the borrower is seeking to stay in the home which is his/her principal residence, is working in good faith with Citi, and has sufficient income for affordable mortgage payments.” There are four — count them, FOUR — conditions for a moratorium (and, ostensibly, an associated loan modification). First of all, Citi must have the mortgage held in portfolio and not have securitized it; that rules out most subprime and Alt-A mortgages, right off the bat. Even for those mortgages held in portfolio, the borrower must want to stay in their home; and we know that a vast number of borrowers are now significantly underwater on their mortgages, meaning that their desire to stay may be questionable. We haven’t covered the phenomenon of “walking away” here at HousingWire because it’s an urban legend; it’s becoming a real problem for many servicers. The pool of moratorium-eligible mortgages keeps shrinking from there. A borrower “working in good faith” is industry code-speak for having contacted their servicer — and we know from prior research at Freddie Mac that roughly half of all borrowers who are foreclosed on never once speak to their servicer. It’s also means that Citi is expecting borrowers to provide full documentation to the servicer: tax statements, income history, all of it. And, as we’ve discussed here at HW numerous times before, there are a fair number of borrowers who have little incentive to do so, given that they lied to get their original loan in the first place — documenting income would offer strong and credible proof that they committed fraud to get their mortgage. That leads us to the last criteria; borrowers must have sufficient income for affordable mortgage payments. We don’t know exactly what an “affordable payment” is here, except that Citi has said it will allow a loan modification that pushes an interest rate down as low as 1 percent, similar to the FDIC/Indymac Federal plan. And we know that a fair number of borrowers won’t qualify, given the problems mentioned earlier around fraud; and now, with the economy tanking and unemployment soaring, many borrowers won’t qualify simply because they’ve been downsized or laid off from their jobs. If you reflect on this, however, you have to think about whether an interest rate reduction will really solve the affordability problem for some borrowers; at best, it’s forcing the industry to subsidize below-market rate mortgages for the entire term of the loan, given that many of these borrowers are interminably underwater on principal owed — and will Citi, and other servicers, ever be able to raise the rate on the loan? We’re told now its a temporary measure; I’d suggest it’s either kicking the default can a little further down the road, or setting up an entirely new class of borrowers that have gained the mortgage banking equivalent of rent control. Neither is good precedent. Even worse precedent is the message being sent to borrowers who actually can afford their mortgages, and were good actors during the housing mess. What incentive to they have to continue to pay 5, 6, 7 or 8 percent on their notes, even if they can afford to do it? They could just as easily afford that 1 percent rate that their neighbors are now chasing, and must be praying to the mortgage gods that the “proactive” programs being put into place deliver unto them a below market-rate rent for their homes, too. The point here isn’t that Citi, or the other servicers that have announced similar plans ahead of it, is being a bad actor; our sources suggest the moves are designed to pre-empt more stringent affordability criteria that a Democratic Congress is said to be considering in the name of “preserving home ownership.” Which is why it’s only a matter of time before you see Treasury and HOPE NOW jump on the modification bandwagon; it seems like a foregone conclusion, at this point. The truth about these programs, however, may be less glamorous than either the breathless headlines and hopeful analysis from financial press would suggest. Write to Paul Jackson at paul.jackson@housingwire.com.