WASHINGTON — It has been a year since the phrase "loan modification" started tripping off tongues, and yet the process of renegotiating troubled mortgages remains a mess.
There is no agreement on what the problem is, much less the solution.
The latest plan — spending $50 billion to guarantee servicers against losses if they agree to modify more loans — seems to be dying on the vine. Federal Deposit Insurance Corp. Chairman Sheila Bair advocated that approach late last month, but the Bush administration is balking. Sources said Friday that the White House may leave the issue to the Obama administration to resolve.
At a press conference Friday, President-elect Obama said he did not want policymakers to give up on foreclosure prevention.
"It is absolutely critical that the Treasury work closely with the FDIC, HUD, and other government agencies to use the substantial authority that they already have to help families avoid foreclosure and stay in their homes," he said.
Industry sources mainly side with the Bush administration, claiming that such a program would perversely encourage defaults, since borrowers would see a chance to reduce their mortgage balances.
Lenders and servicers continue to say the big hurdle to modifications is the threat of being sued by investors claiming a breach of pooling and servicing agreements.
"If the loan has been securitized, the servicer must work with a myriad of investors and get their approval before the loan can be modified. Otherwise, the investors can and will likely sue the servicer," said Anne Canfield, the executive director of the Consumer Mortgage Coalition, whose members include the industry's biggest banking companies with servicing arms.
Bruce Marks, the president of the Neighborhood Assistance Corp. of America, disagreed with the idea that the contracts are to blame.
"This perception that all these evil, private investors are out there and saying, 'No, no, no — we want to get a higher return,' is not the case," he said. "The issue is the servicer."
FDIC officials are similarly unswayed.
"I don't think the pooling and servicing agreements per se have been a real challenge," said Michael Krimminger, a special advisor for policy at the agency. The challenge is the willingness of servicers "at times to be a little bolder and say that, 'We're not going to stay to the tried and true approach of doing customized mods one by laborious one, but we're willing to do something that's actually able to step up to the scope of the problem that we're facing today in this country.' "
Rod Dubitsky, the head of Credit Suisse Group's asset-backed securities research division, said roughly 70% of $12 trillion of mortgages have been securitized.
Modifications will not work until the government takes control of entire securitizations, he said. "If they can't buy securitizations, they can't materially reduce foreclosures."
David Berenbaum, the executive vice president of the National Community Reinvestment Coalition, agreed with that assessment.
"The federal government, if they became the owner of these tranches, that would address some of the issues relative to the servicing agreements," he said. "The federal government could have authority to rework the loans so that they're affordable to consumers."
But J. Bruce Boisture, the managing partner of Grais & Ellsworth LLP, said these deals can top $2 billion. "The numbers are just too big," and the government would have "no way of compelling the bondholders to sell it, other than by the most draconian exercise of government power," he said.
Mr. Boisture suggested that servicers defer borrower payments or extend loan terms, as long as the investors are still fully compensated. "Instead of a 20-year mortgage with $1,000 a month, you might end up with a 30-year mortgage with $750 a month."
Others are calling for the appointment of trustees that would have more power to modify loans in a mortgage pool.
"If the government can go to court and get a declaratory judgment, saying that the somewhat adjusted servicing standards were 'in the interest of the investor,' then that might clear away some of the legal issues," said Ms. Canfield.
Former FDIC Chairman L. William Seidman advocates establishing special trustees that would have more power than the servicers to restructure troubled mortgages within a single securitization trust.
A court could "appoint a trustee with the authority to handle all the mortgages in that trust" and would have "the authority to renegotiate the loans," Mr. Seidman said.
Now that the government controls Fannie Mae and Freddie Mac, it also could compel them to change the servicing standards for the loans they securitize to state that a modified loan is in the best interest of the investor.