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ASF Framework for Foreclosure and Loss Avoidance Offers Help for Over 1 Million Homeowners With Securitized Subprime ARM Loans
December 6, 2007
Press Release
New York, NY – Nearly two-thirds of the 1.8 million subprime adjustable-rate mortgage (ARM) borrowers facing upward rate resets over the next two years can be more efficiently helped with refinancings, loan modifications and other loss mitigation strategies under a new recommended framework announced today by the American Securitization Forum (ASF). The framework has been endorsed by the U.S. Treasury Department, the Department of Housing and Urban Development and federal bank regulators.
Using individual borrower criteria such as credit scores and home equity, servicers can use the ASF framework to help streamline evaluation of their subprime ARM portfolios and fast-track borrowers more efficiently into appropriate solutions for their individual needs. Based on these metrics, borrowers can be segmented into four different groups: those eligible for refinancing; those eligible for a loan modification; those who need intensive analysis of their debts and income; and those who can afford the higher reset rate, and therefore need no assistance. In addition, the ASF also issued recommended standards for servicers to use when reporting loan modification activity to securitization investors.
“This framework for streamlining servicer procedures is one of many initiatives the ASF has undertaken on behalf of the securitization industry to minimize foreclosure and preserve home ownership wherever possible, using a variety of options available to borrowers,” said George Miller, executive director of the American Securitization Forum. “By using a common framework to evaluate borrowers’ situations and expedite the decision making process, servicers should be able to pursue refinancing and loan modification options on a more systematic basis, and deliver relief more rapidly to larger numbers of borrowers in need.”
The ASF framework, titled the “Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans,” was developed among its members, which include servicers, investors, and issuers.
By employing a criteria-based approach that ensures each individual loan is reviewed, the ASF framework preserves the essential requirement that decisions about modifications be made on a loan-by-loan basis. In addition, the guidance makes explicit that servicers will not take any action prohibited by the agreements which govern securitized loans, which include provisions to ensure that any modifications are in the best interests of investors.
“While the focus of the ASF framework is to facilitate refinancing and loan modification it has also been designed to balance the interests of borrowers and investors and preserve the benefits of the securitization market,” said Tom Deutsch, deputy executive director of the American Securitization Forum. “This includes protecting the contractual entitlements and economic interests of investors and other transaction participants, who collectively supply the funds upon which the mortgage finance system depends.”
According to data from the Federal Reserve Board, approximately 1.8 million subprime ARMs are expected to reset to a higher interest rate in the next two years. Nearly two-thirds of these loans are held by customers whose payment history demonstrates they are able to afford their introductory rate, but are deemed unlikely to be able to afford higher payments after their loans reset.
Under the ASF framework, subprime borrowers who need assistance are divided into three segments. Borrowers falling into segment one are current on their loan payments and meet credit score thresholds and the amount of equity in their homes indicate that they are likely to be eligible for refinancing opportunities. Servicers of these loans will structure the refinancings to avoid prepayment penalties whenever possible, and the ASF recommends servicers take all reasonable steps to encourage or facilitate refinancing for these borrowers.
Borrowers falling into segment two may be eligible for a fast-track loan modification if they are current on their loans but ineligible to refinance into any available mortgage product because of poor credit scores, low or no equity in their homes or a history of delinquent payments. Borrowers in this category could be offered a loan modification freezing the interest rate at the introductory rate for 5 years. Freezing payments at a level these borrowers have demonstrated they can afford increases the likelihood of avoiding foreclosure in these circumstances, which benefits borrowers and investors alike.
Segment three is comprised of loans where the borrower is not current on loan payments at the existing introductory rate and does not qualify to refinance into any available mortgage product. These borrowers should work with their servicers, who will determine on a loan-by-loan basis without the benefit of a fast-track approach, the appropriate loss mitigation approach, which may include a loan modification such as rate reduction or principal reduction, forbearance, short sale, short payoff or foreclosure.
Media Contact: Katrina Keller, 646.637.9281, kkeller@americansecuritization.com
*Please click here for a question and answer document regarding the framework that was released on December 17, 2007.