Mortgage Investors Press For More Loan Modifications

According to Bloomberg, the mortgage bond investment community is pressing for more government and bank assistance to borrowers who are underwater on their mortgages. Bloomberg report below:

Mortgage-bond investors want more homeowners to be given aid that reduces the size of their debt below the value of their property, a Fortress Investment Group executive will tell Congress.

Banks controlling loan-modification decisions as servicers have stood in the way of such relief because other types of changes to mortgage terms don’t require the banks to suffer losses on their holdings of home-equity loans, Curtis Glovier, a managing director at the New York-based asset manager said in prepared testimony to the Senate Banking Committee in Washington today.

“Investors are willing to do our part by making a significant sacrifice in reducing mortgage principal,” he said, speaking on behalf of the Mortgage Investors Coalition, a group formed in April that represents 11 firms with $200 billion of assets under management.

Mortgage-bond investors want, he said, to see greater use of the Federal Housing Administration’s Hope for Homeowners program for loans backing their securities. The program was created last year and revised in May by lawmakers as part of efforts to stem foreclosures roiling the U.S. economy.

Under the program, borrowers with “negative equity” get part of their mortgages forgiven as they refinance into government-insured loans. The program requires a holder of home- equity debt to accept a pay-off representing a small amount of what it is owed, whereas other loan changes allow the debt to be kept “on the books of the financial institution as a performing asset,” Glovier said.

While under the Obama administration’s $75 billion Home Affordable plan, participating servicers must offer the Hope for Homeowners aid to eligible borrowers, the plan otherwise doesn’t call for first-mortgage balance reductions, focusing instead on reducing housing payments to 31 percent of borrowers’ pay.

“By not addressing negative equity, homeowners are trapped in a mortgage that cannot be refinanced and a house that cannot be sold,” Glovier said. “When the program ends in five years, the interest rate on both the first and second mortgage will reset higher, the outstanding balance of the combined mortgage debt is likely to still exceed the value of the home, and there could be a meaningful risk of a re-default.”

The U.S. government should consider using funds from the $700 billion Troubled Asset Relief Program to “more aggressively compensate second-lien holders as their investments are extinguished,” he said.