WASHINGTON — Top lenders and servicers are scheduled to hold a private meeting today with Treasury Department officials to recommend best practices for handling second liens and dealing with other obstacles as part of an effort to stem foreclosures.
According to discussion drafts and a meeting outline obtained by American Banker, industry participants plan to recommend swapping second liens in order to allow primary first-lien holders to gain control of total outstanding mortgage debt. Second liens, which must be released or extinguished to allow a loan modification on the primary mortgage, have hindered servicers and lawmakers working to stop the housing crisis.
"Everyone agrees it has to get resolved one way or another. … It's a pretty big issue, because it's an impediment to modifications," said a source familiar with the meeting.
Today's meeting is a follow-up to one on April 24 called by Treasury Secretary Henry Paulson. He and Robert Steel, Treasury undersecretary of domestic finance, met with executives from Washington Mutual Inc., Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Ocwen Financial Corp., IndyMac Bancorp Inc., and Residential Capital LLC to discuss continuing problems in the housing market.
During the April 24 meeting Mr. Paulson urged lenders to come up with a plan to deal with second liens, provide more detail on loan workouts, and help so-called "underwater" borrowers, those who owe more on their mortgages than the value of their home. The meeting today is an attempt to report on progress since that time. (Mr. Paulson is not expected to attend today's meeting, sources said.)
According to the meeting's agenda, participants are scheduled to discuss second-lien mortgages, standards and principles for workouts, loan modifications, and industry concerns about the Federal Housing Administration. Participants in the meeting emphasized these are ideas for discussion and could change.
Much of the six-hour meeting is expected to focus on second liens, which are typically held by a different investor group than the holder of a primary mortgage and would need to be terminated to let a refinancing or modification proceed. Bankers said many second-lien holders are getting no return on their loans amid the housing crisis.
Industry representatives said second liens continue to stymie restructuring efforts. Many first-lien holders do not know who owns a second lien, for example.
Of subprime loans originated in 2006, more than half had a simultaneous second lien, said Mark Zandi, chief economist and co-founder of Moody's Economy.com Inc.
"It is arguably one of the most significant impediments to the refinancing efforts," he said. "The problem with a second lien is" that those holding them "realize they are going to lose perhaps everything, and rather than recognize that up front today, they are willing to take their chances and let the loan go through the foreclosure process … or more likely they are hoping it is in the interest of the first-lien holder to pay them something."
Though bankers have not finalized any plans, industry representatives are discussing several ideas. One, listed in the agenda for today's meeting, is a way to swap second liens in order to give first-lien holders control of all mortgage debt.
Though details were scant, industry participants are also examining when second liens should be automatically "resubordinated," effectively waiving the right to object to a modification.
According to a draft document, second-lien holders could be persuaded to resubordinate their position if a refinancing did not result in a worse condition for them. The document defined that as a refinancing where the new loan did not increase the monthly rate on the first-lien amount by more than reasonable closing costs or a modification that lowered the monthly payment of the first lien through a term extension, rate reduction, or principal writedown.
The document also outlined how to treat second liens in a short sale, when a borrower sells a home for less than his or her outstanding mortgage debt. Under the suggested framework, any proceeds exceeding the amount owed to the first-lien holder after a short sale would be paid to the second-lien holder. In the event that the short sell did not cover the first lien, the second-lien holder would agree to accept a "token fee" to release the lien, the document said.
Accurately appraising property is another hurdle. To handle it, bankers will recommend that a disinterested third party determine the current market value for the second-lien swap.
Lawmakers, too, have been wrestling with how to treat second liens under various housing rescue plans. House Financial Services Committee Chairman Barney Frank's bill to expand the Federal Housing Administration to insure underwater loans after a principal writedown delegates regulators to find a way to compensate second-lien holders.
An oversight board would have the flexibility to set a pricing formula for the primary lien holder to pay the subordinate lenders or to allow subordinate liens to be compensated through sharing a limited portion of the written-down loan's appreciation.
Another source familiar with the Treasury meeting said the bankers' suggestion to the Treasury may be an attractive option for Rep. Frank if it comes soon enough.
"If it's viable and all the parties agree, then sure, why would he not try and coordinate those ideas?" the source said.
Industry participants are also expected to offer revised mortgage servicing guidelines and provide a template of a new letter to borrowers who have sought a modification.
According to a draft of the guidelines dated April 29, members of the Hope Now alliance would agree "to engage in the judicious use of various loss mitigation options that include" forbearance, modifications, repayment plans, partial claims, stipulated repayment plans, short sales, principal reductions, and deed in lieu of foreclosure.
Possible modifications include adding past-due payments to the current loan balance and recalculating a new monthly payment based on the remaining term and changing the interest rate based on available income, the draft guidelines said. If such modifications do not work, the guidelines recommend that servicers, on behalf of investors, agree to reduce the loan principal.
Federal Reserve Board Chairman Ben Bernanke has already urged lenders and servicers to engage in principal writedowns, the haircuts that form the basis of Rep. Frank's FHA rescue plan. At the meeting, participants are also expected to discuss concerns about the FHA and specific areas where they would like rule changes. Sources did not provide more details about what changes those are.
Servicers are also expected to streamline efforts with borrowers. Industry participants have drafted a letter to send to a borrower within five days from a loss-mitigation request.
The letter lays out the modification process and pledges a monthly status update to the homeowner. Servicers agreed to communicate all denials and reasons for denials for workouts to the borrower within five days of the decision.
