Monday, December 10, 2007

It's About Not Having To Work Very Hard

by Tanta on 12/10/2007 12:06:00 PM

Tom Petruno in the LAT gets it:

Some analysts said the risk of borrowers returning for more forbearance could be intensified by a provision in the program that calls for fast-tracking hundreds of thousands of loans for a rate freeze, as opposed to undertaking a detailed and time-consuming study of the borrowers' finances.

"To decide if a modification is beneficial," analysts at brokerage Deutsche Bank Securities wrote in a note to clients Friday, a mortgage servicer needs to assess the borrower "with the same degree of care as a new borrower walking through the door."

Determining eligibility for a rate freeze based on just a few criteria, as the Bush plan proposes, "is to repeat the same type of underwriting shortcuts that got us here," the analysts wrote, referring to the no-questions-asked frenzy of 2005 and 2006 that gave home loans to almost anyone who could fog a mirror.

But the administration and its financial industry allies said the crumbling housing market dictated the need for speed in addressing the problem many borrowers are facing in holding on to their homes.

"The standard loan-by-loan evaluation process that is current industry practice would not be able to handle the volume of work that will be required," Treasury Secretary Henry M. Paulson Jr. said Thursday in announcing the program.
That is the issue and has always been the issue. But then Paulson wasn't in much of a position to lecture servicers about doing things right the first time and displaying a "degree of care":
As President Bush announced the modification plan, The Wall Street Journal reported that the SIV fund likely would be half of the $100 billion originally envisioned, apparently because some SIVs did not want to participate.

The loan modification agreement, meanwhile, came together in a relative rush. Sources said that discussions on it did not begin until after Thanksgiving, and that the first meeting on it was not until Nov. 29. Details of the plan were still being worked out until moments before the announcement Thursday afternoon.

Indeed, federal regulators appeared to have been kept in the dark about many of the plan's details. That proved awkward at a House Financial Services Committee hearing on loan modifications Thursday morning. Chairman Barney Frank challenged bank regulators on the plan, who acknowledged it was still in flux.

A Treasury spokeswoman did not return calls seeking comment. [American Banker, registration required]
I don't know that I've ever really seen this much homework eaten by this many dogs before. I guess the good news is that the dogs aren't going to starve.

Of course, if you ask Paul Krugman, he'll tell you that it's not so much that the dog ate the homework; it's that we're grading on the Bush Curve:
By Bush administration standards, Henry Paulson, the Treasury secretary, is a good guy. He isn’t conspicuously incompetent; and he isn’t trying to mislead us into war, justify torture or protect corrupt contractors.
There's a masterpiece of damning with faint praise.

So putting together some sloppy plan to let sloppy servicers slop along with sloppy modifications is probably the best we could have hoped for. At least no one is (yet) suggesting that we load the nonperforming loans up in CIA planes and fly them to secret detention centers in the dead of night for a few torture sessions. What a relief. I doubt we could have found the original loan file to put it on the plane . . .

But fear not: having gotten permission to do sloppy mods, we're sure that lenders are done asking for permission to do more sloppy stuff, right? Wrong. According to Mortage News Daily (sub required):
To deal with a large volume of loan modifications, the Mortgage Bankers Association is asking the Financial Accounting Standards Board for relief from its rules for evaluating credit impairment on hundreds of thousands of subprime adjustable-rate mortgages. The MBA has endorsed President Bush's plan to freeze the resets on subprime ARMs. However, its members maintain that they don't have the systems capacity to evaluate loan impairment under Financial Accounting Standard No. 114 on a loan-by-loan basis and would like to use FAS 5 instead. "FAS 5 provides for a cost-effective approach to accurately measuring probable credit losses on large volumes of loans, which is consistent with the objective of a loan modification, which is to reduce the prospect of future credit losses," the MBA says in a letter to FASB.
I guess we're supposed to be grateful that they're asking first.