WASHINGTON — Federal regulators are expected to release guidelines Wednesday that detail how lenders and servicers should conduct loan modifications — a critical step that will effectively kick off the Obama administration's $75 billion foreclosure prevention plan.
The guidelines are expected to detail who would be eligible for a Federal Deposit Insurance Corp. loan guarantee plan, how regulators are defining at-risk homeowners and how servicers should assist underwater borrowers, among other items, sources said Tuesday.
Under the plan, many lenders and servicers would need to seek a new appraisal and conduct additional underwriting to determine whether a loan is eligible for assistance, according to a source familiar with the guidelines.
In some cases, regulators will allow servicers to use the government-sponsored enterprises' automated valuation model, the source said, but current borrower income must be verified.
Another part of the administration's proposal is a $10 billion partial guarantee program with the FDIC to discourage lenders from foreclosing on mortgages that could be viable out of fear that home prices will fall even further later.
When the administration announced the program Feb. 18, it offered very few details on the guarantee program.
But a source said the guarantee would kick in 12 months after home prices depreciate in a homeowner's market.
The amount of the guarantee would depend on how far prices in the neighborhood fall, with servicers that face severe declines receiving more money, the source said.
Much of the focus of the plan is on helping lenders to reduce borrowers' monthly payments to a 31% mortgage debt-to-income ratio. After lenders bring down payments to lower the ratio to 38%, the government would kick in incentives to help lower it further.
But one issue likely to raise problems is how regulators define eligibility for the program, which is open to delinquent borrowers and those at "imminent danger of default."
Investors are concerned that regulators could be too lenient and allow too many performing borrowers into the program.
The guidelines say that issue has to be dealt with on a case-by-case basis, with servicers focusing on proof of "individual hardship" that makes it likely a borrower will default, the source said.
For borrowers who are already delinquent, lenders would look at those in the pipeline to determine if they are eligible.
The guidelines are also expected to offer incentives to encourage more modifications.
Under the current system, servicers and investors often receive some payment from mortgage insurance premiums once a home is foreclosed. The administration is expected to press for mortgage insurance companies to kick in a partial payment if a loan is modified, in order to give servicers and lenders more reason to avoid foreclosure.
So far the administration appears to be rejecting calls to broaden the plan. Under the guidelines, only loans under the GSE conforming loan limit (currently $729,500) would qualify for government assistance, the source said. The administration also rejected calls to raise eligibility requirements beyond a 105% loan-to-value ratio.
Mortgage bankers had argued that the plan would leave out borrowers in high-cost states such as California, Florida and Nevada.
Though the guidelines are designed to establish a national standard for modifications, they may not go enough for some servicers, who worry that they would still be subject to investor lawsuits for violating servicer contracts. To completely shield against suits, servicers say legislation is necessary. Though lawmakers support the concept, a bill has not been passed.
"At the end of the day, only Congress can change law, and that's why you have a much higher level of assurance if Congress changes the law," said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick PC. "If the administration does something, it sets the standard for reasonable behavior, but it doesn't change law. That's why servicers would feel more comfortable if they change the law."
