Pipeline

Basic Training

The nonprofit USA Cares has launched a program, paid for with a $50,000 grant from Fannie Mae, to show mortgage loan officers how to work with military clients.

The online course, which is free and takes a couple of hours to complete, provides lenders with an overview of the military rank and pay system, and breaks down common acronyms.

Military loan applications are often delayed because lenders do not always understand military paperwork and language, USA Cares said.

"All they really need to know is how to qualify the person for the loan," said Beverly Frase, USA Cares' program manager of military housing lender education. And that comes with understanding how the military pay structure works, she said.

Program participants will be required to pass a 35-question, multiple-choice, open-book exam at the end of the course to receive a certificate of completion.

USA Cares will list certified loan officers on its Web site so military personnel can find participating lenders easily.

USA Cares, of Radcliff, Ky., provides financial and other assistance to veterans and active military personnel who have served in Iraq or Afghanistan since September 2001 and their families.

Seconds in Front

Barney Frank's call for banks to forgive principal on second liens was music to the ears of mortgage bond investors who have been pushing the idea for about a year.

The House Financial Services chairman wrote in a letter to the four largest banking companies dated March 4 that their refusal to take hits on second mortgages has been "a principal obstacle" to preventing foreclosures.

"Large numbers of these second liens have no real economic value — the first liens are well underwater, and the prospect for any real return on the seconds is negligible," the Massachusetts Democrat wrote.

Yet the holders of the second liens "refuse to acknowledge the losses and write down the loans, which would allow willing first-lien holders to reduce principal and keep borrowers in their homes."

(The four recipients of the letter — Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. — hold more than half of the roughly $660 billion in home equity loans, according to Lender Processing Services Inc. in Jacksonville, Fla.)

The Mortgage Investors Coalition, a group of 15 money management firms and hedge funds, wants the government to offer banks incentive payments to write down second liens. The group's members, which manage more than $100 billion in residential mortgage-backed securities, are willing to write down their first liens to 96.5% of the homes' current value, as long as second lienholders take a proportional writedown as well. Once the borrowers' debt was reduced, they would be refinanced into Federal Housing Administration loans.

"Bondholders are putting money on the table. They're not asking for a subsidy," said Micah Green, a partner at the law firm Patton Boggs who represents the coalition.

He said investors are increasingly concerned that the administration's Home Affordable Modification Program is not working, and that more borrowers will simply redefault and go into foreclosure.

When Hamp was introduced a year ago, second liens were famously left unaddressed. Banks would have to take further capital hits if they had to write down second liens.

In August, the government unveiled 2MP, a supplemental program to Hamp in which companies agree to reduce a borrower's second-lien payment if the first lien has also been reduced. But so far only B of A has signed for 2MP, compared with 106 servicers participating in Hamp.

"The blockade here is the second lien," Green said. "It's become increasingly clear that the back-end debt-to-income ratio on these loans is leading to redefaults. You cannot address the problem of the homeowner unless you reduce the second lien. The government needs to incentivize the banks."

Surprisingly, home equity loans on depository balance sheets are performing much better than first liens, further reducing banks' incentive to take writedowns.

"If homeowners are paying their credit card bills and home equity line of credit and they're not paying their first lien, it is a potentially devastating scenario for the future of the mortgage market," Green said.

Quotable …

"'Midprime' was a kind of triumph of language over truth. Some crafty bond market person had gazed upon the subprime-mortgage sprawl, as an ambitious real estate developer might gaze upon Oakland, and found an opportunity to rebrand some of the turf. Inside Oakland there was a neighborhood, masquerading as an entirely separate town, called 'Rockridge.' Simply by refusing to be called 'Oakland,' 'Rockridge' enjoyed higher property values. Inside the subprime-mortgage market there was now a similar neighborhood known as 'midprime.' "