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The Cramdown Journal

The Cramdown JournalRecent loan modification news

January 6, 2009

By staff

A number of varying entities have varying opinions about proposed legislation that would empower bankruptcy judges to modify mortgages on primary residences. Other activity in the loan modification business includes an increase in monthly modifications on agency mortgages.Average monthly modifications on loans managed by Fannie Mae and Freddie Mac have risen from 2,883 during 2007 to 4,497 during the third-quarter 2008, the Federal Housing Finance Agency reported today. November modifications of 8,291 jumped from 5,600 in October.

Borrowers on the government sponsored enterprises’ loans were granted a moratorium on foreclosures in November to allow more time to participate in the streamlined modification program for agency loans.

An increase in the allowable limits for loan modifications on several Residential Funding Company LLC transactions has not prompted Moody’s Investors Service to issue any downgrades on the transactions. Moody’s explained that the securitizations would not be adversely impacted because modifications are being used judiciously and can enhance the overall pool value.

Bankruptcy cramdowns as proposed by Congress could result in pro-rata principal losses to some senior securities that might otherwise be immune to traditional credit losses, Standard & Poor’s Raitings Services said in a report last month. The legislation would enable interest-rate reductions, principal balance adjustments and loan-term extenisions. Term modifications could delay expected trust income, while “moral hazard” effects could have an adverse impact, S&P said.

But the ratings agency noted that cramdown losses might be comparable to traditional modification losses.

Moody’s reported that a number of uncertainties exist about potential cramdown legislation, including the language of any final law, judicial interpretation and actions by mortgage servicers who may be motivated to increase voluntary loan modifications. Moody’s said that some jumbo and Alt-A residential mortgage-backed securities could see significant negative impact as a result of “carve-out” clauses that impact the share of losses by each class.

A weekly RMBS trading desk strategy newsletter from Bank of America said that the proposed bankruptcy cramdown bill is a destabilizing development for the market.

“While the cramdown threat is likely to put more pressure on servicers to step up their loss mitigation efforts, bankruptcy fillings are expected to shoot up if the legislation is enacted,” BoA said. “From a valuation standpoint, the special treatment of bankruptcy related losses in several non-agency deals poses a serious threat to the stability of the market.”

But BoA said the principal cannot be lowered to less than the asset value — limiting the negative consequences. It also noted that moral hazard consequences will be limited by the requirement that borrowers fully disclose their assets — restricting their ability to force a principle reduction just because they are in a negative equity position.

Mortgage Bankers Association President and Chief Executive Officer John A. Courson testified before the House Financial Services Committee this week about the limitations currently faced by servicers on loan modifications.

“Although most pooling and servicing agreements allow for modifications and workouts, not all do,” Courson testified. “Some pooling and servicing agreements that allow modifications and workouts may contain conflicts, while others may be silent on modifications, thus increasing the risk of liability for the servicer.

“These problems have limited servicers’ ability to help borrowers.”

Courson called on legislators to include a provision in the pending bill, H.R. 703, that would indemnify servicers from liability if the safe harbor provision is determined to be unlawful.

MBA found support from the American Bankers Association’s CEO Edward L. Yingling, who testified that issues of legal liability are inhibiting foreclosure prevention. He added that the safe harbor provision should be made applicable to trustees.

John F. Bovenzi, chief operating officer of the Federal Deposit Insurance Corporation and acting CEO of IndyMac Federal Bank FSB, testified at the same hearing that a modification guarantee program previously proposed by the FDIC could prevent as many as 1.5 million foreclosures. After factoring a potential re-default rate of 40 percent, $400 million has been saved through FDIC’s streamlined modification plan at IndyMac.

“The FDIC generally supports the concept of a safe harbor for servicers in connection with loan modifications,” Bovenzi said. “However, we note that, in crafting safe harbor provisions, it is important to avoid language that would implicate a constitutionally impermissible taking through the impairment of contract rights.”

Tens-of-thousands of borrowers who were at risk of default but still current were contacted by a top-10 residential lender utilizing a system from Austin Logistics Inc., an announcement Monday said. A “surprisingly high number” of the borrowers responded favorably, and they willingly completed surveys about eligibility for loan modifications.

Austin Logistics said the bank was able to adapt customer analytics to maximize the benefit.

Leadsnet Inc. reported an increase in the volume of loan modification leads. The company said consultants and loan officers with active registrations currently total 12,000.

Mortgage Leads Network announced that it has assembled a team of attorneys and consultants who specialize in commercial loan restructuring to help commercial mortgage borrowers obtain better modification terms from their lenders.

The National Loan Modification Center announced Tuesday that it is “the nation’s leading provider of legal loan modifications and loan workout services.” A staff of attorneys with the Parsa Law Group helps delinquent borrowers negotiate modifications.

In a press release today, Mortgage Law Group noted that it is targeting Citigroup Inc. borrowers for modifications of principal loan balances. The Aliso Viejo, Calif.-based firm said borrowers are at a disadvantage when they negotiate with lenders using a loan modification firm that is not also a law firm.

Mortgage Modification Legal Network said this week that it participated in a modification event in Southern California hosted by “the largest bilingual church in the nation.” The statement indicated that the event was attended by “thousands.” has been launched to provide a forum for delinquent borrowers to discuss foreclosure issues.

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