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ASF Raises TARP Opportunities to Expand Loan Modifications; Suggests Buying Troubled Mortgages Out of Securitized Pools
Press Release
November 14, 2008
New York, NY—Tom Deutsch, deputy executive director of the American Securitization Forum (ASF), testified today before the Subcommittee on Domestic Policy of the Committee on Government Oversight and Reform at a hearing titled “Is Treasury Using Bailout Funds to Increase Foreclosure Prevention, as Congress Intended?”
While highlighting the significant effort put forth by the securitization industry to prevent avoidable foreclosures and preserve home ownership wherever possible, Mr. Deutsch noted that macro economic forces bearing down on an already troubled housing market are simply too strong for private sector loan modification initiatives to counteract the nationwide increase in mortgage defaults and foreclosures.
“Although industry-driven loan modification and loss mitigation actions have been and will continue to be key components to preventing avoidable foreclosures, there are limits to their effectiveness in addressing the extraordinary challenges in the housing market. As such, we believe expanded government programs may be effective in bridging this gap, and helping to address the potential foreclosures that commercial and contractual arrangements cannot prevent,” said Mr. Deutsch.
The three areas under the Troubled Asset Relief Program (TARP) the ASF identified where the federal government could supplement industry initiatives to modify and expand voluntary programs include: 1) guaranteeing loan modification redefault risk, 2) purchasing individual loans out of securitization trusts, and 3) providing lender or guaranty facilities for servicer advances.
The recently enacted Emergency Economic Stabilization Act allows the federal government to provide guarantees to incentivize additional loan modifications for distressed borrowers. The ASF believes there have been some positive proposals put forward that would have the federal government, through TARP, provide credit guarantees for redefaults on modified loans. Currently, up to 44 percent of borrowers redefault on their loan even after the lender has granted a loan modification concession.
“ASF believes a well-tailored program could result in a significant increase in loan modification activity to help homeowners stay in their homes and provide significant support for a declining housing market,” said Mr. Deutsch. “There appears to be a substantial opportunity to marry a much larger industry-wide loan modification protocol with a guarantee program under TARP.”
In his testimony, Mr. Deutsch explored in detail the opportunity under the TARP for the program to purchase individual distressed loans out of MBS trusts, which could give the Treasury Department unlimited discretion to modify those loans.
“Historically, whole loans have not been sold out of securitization trusts by servicers for a variety of legal, tax, and accounting constraints,” said Mr. Deutsch. “The ASF supports, where feasible, facilitating such purchases as part of a broader range of loss mitigation alternatives, and has recently undertaken a review of the various opportunities and obstacles for servicers to sell below par individual distressed loans out of MBS to the TARP.”
While the sale of distressed loans to third parties has not typically been a loss mitigation option that servicers had available, this approach may be viewed as one more loss mitigation technique that a servicer could utilize. Unless the securitization servicing agreement prohibits the sale of these types of loans, and as long as appropriate relief from the accounting and tax consequences is obtained, the ASF could consider reinforcing a market practice that the servicer be permitted to consider such a sale as one option among the loss mitigation techniques it may consider when deciding which course of action to pursue with a defaulting loan.
“Adding the sale option, of course, does not change the servicer’s responsibility to analyze what loss mitigation strategy is optimal to pursue,” explained Mr. Deutsch. “Ultimately, the servicer’s decision must still be based on its analysis of which approach would result in the maximum net proceeds, or net present value basis, to the securitization trust.”
The American Securitization Forum is a broad-based professional forum through which participants in the U.S. securitization market advocate their common interests on important legal, regulatory and market practice issues. ASF members include over 330 firms, including issuers, investors, servicers, financial intermediaries, rating agencies, financial guarantors, legal and accounting firms, and other professional organizations involved in securitization transactions. The ASF also provides information, education and training on a range of securitization market issues and topics through industry conferences, seminars and similar initiatives. For more information about ASF, its members and activities, please go to www.americansecuritization.com. The ASF is an independent affiliate of the Securities Industry and Financial Markets Association.
Media Contact: Katrina Cavalli, kcavalli@americansecuritization.com, 212.313.1181