Banking Law

Wilbur Ross: Home Loan Modification Program Falls Short

Bazllionaire Wilbur Ross, a man who's made a big play on mortgage servicing rights and who's waiting until the US government ":gets real" on the terms it offers to private investors before he jumps into the bailout of broken financial institutions, had some interesting opinions about the proposed borrower bailout program. According to Housing Wire, he thinks that it doesn't go far enough.

Obama?s plan earmarks $75 billion to reach an estimated 9 million homeowners over five years. That?s $8,000 per borrower, broken down to $1,600 a year, to offset the cost of mortgage modification. Ross told CNBC?s Squawk Box this morning, ?Does anyone really think that all that keeps 9 million people from losing their homes is $1,600 per year? I don?t think so.?

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Last week, Ross told HousingWire in an interview that he thinks the best way to motivate lenders, servicers, and homeowners work together on modifications requires far more than what?s been proposed so far. In particular, he believes that what?s needed is aggressive principal modifications for borrowers most in need. He has said that his American Home servicing shop has seen six-month recidivism rates below 20 percent ? compared to the 50 or 60 percent standard in the industry ? because the servicer has been aggressively looking to cut principal balances.

?The price of housing needs to be cleaned out. The Obama administration could right-size every underwater home and reduce principal to fit the current market value of the home. If they are going to deal with it they have to deal with it in a severe way,? Ross told HousingWire. ?They also really need to consider all borrowers who are underwater, and not just the ones that have gone into default.?

The Homeowner Affordability and Stability Plan does some of that, but doesn?t go far enough, Ross suggested. ?The have to reduce the principal amount of loan, not just nonperforming loans, but also performing ones,? he told CNBC. ?Why should a guy who?s not paying benefit, while some poor citizen who?s struggling to make the payments gets stuck with the mortgage??

His own plan looks something like this:

1. The lender takes a write-down in principal, and the servicer takes a similar hit on any servicing strip on the newly-reduced UPB.
2. After principal reduction, the government guarantees half of the remaining principal the lender now holds.
3. This guarantee of half the principal can now be sold into the securitization market, which will give the lender an income stream on the home again and offset some of the losses the owner of the loan has to take when they write down the principal.
4. When the house is sold, if the value of the home has gone up at the point of sale, the homeowner and the lender share in the profits earned on the gain.

As Housing Wire notes, Ross is somebody whose views are worth listening to, since he's got so much skin in the servicing game, as well as the fact that he's the type of private money "force" that the government is attempting to attract into the next round of the financial institutions bailout.

Less enthusiastic about the borrower bailout were CNCB reporter Rick Santelli and traders on the floor of the Chicago COBE. They sounded like a number of people I've spoken with lately, who are having a hard time mustering up compassion for those who can't or won't pay their mortgage on time. Massive recessions make people cranky.

Full post as published by Bank Lawyers Blog on February 19, 2009 (boomark / email).