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The Politics of Loan Workouts

Image has not been found. URL: http://www.washingtonindependent.com/wp-content/uploads/2008/09/fdic-300x300.jpgFDIC seal (Flickr: kenyee)

In addressing the mortgage mess, the approach of pushing lenders to modify mortgages through loan workouts continues to take center stage — despite a growing controversy over whether they get results. As foreclosures continue to rise, a political battle is heating up as well.

The Federal Deposit Insurance Corp., which seized the failed subprime lender IndyMac in July, is taking on the task of restructuring 25,000 of the institution’s mortgages — an effort being closely watched by the industry. FDIC Chairwoman Sheila C. Bair has been an outspoken advocate of mass restructurings, and critical of servicers for failing to do more of them.

Spokesman David Barr said the early response to the FDIC’s efforts has been good, and that the agency hopes to have all the workouts done by the time it tries to sell the bank next month. “We’ve been pleased with the initial response from the first round of letters we’ve sent out,” Barr said.


Illustration by: Matt Mahurin

In the blogosphere, however, skeptics say the FDIC won’t be able to pull off all the workouts, and that the agency will get a first-hand look at how hard it is for the mortgage industry to do workouts in large numbers.

Tanta at Calculated Risk, an influential blog that covers the housing market closely, put it this way:

Since they’ve promised to use the “maximize value” test here, if they actually manage to get more successful mods done than anyone else has, they will have minimized losses to the FDIC and private investors and we can all congratulate them for that. If, as I fully expect, they don’t do any better at making a silk purse out of a sow’s ear than anyone else can, maybe Sheila Bair will quit pontificating about a subject that remains a lot harder than she thinks it is. That, too, we could all get behind.

Not everyone shares her views. Bruce Marks, chief executive officer of the Neighborhood Assistance Corp. of America, or NACA, a housing advocacy group, said servicers can and should be modifying large numbers of loans. His group plans to launch a nationwide campaign this week to make sure it happens.

NACA has had plenty of experience modifying loans. In July, the group held a five-day event in downtown Washington, encouraging borrowers to show up for loan restructurings. The group expected a few thousand people at the event, but lines quickly formed around the hotel where the group was based. All told, Marks said, NACA handled some 10,000 loan restructurings during that visit.

But so far, only 2,000 of those restructurings have been processed completely by servicers and entered into their computer systems, Marks said, despite having been approved. Other servicers are still delaying final decisions or requiring more documentation.

Some borrowers paying the lower rate negotiated as part of their workout have gotten late notices from lenders. In particular, some Spanish-speaking borrowers have gotten calls from Spanish-speaking representatives of Countrywide Financial Corp., once the nation’s largest subprime lender, telling them they owe the full amount on their loans — not the restructured rate.

Countrywide, which is being bought by Bank of America, did not respond for requests for comment.

Marks said servicers are used to handling cases individually and weren’t prepared to handle the volume of restructurings sent their way. Lenders and servicers are also large, bureaucratic organizations, where it’s common to find one division of the company unaware that another department had already negotiated a restructuring, he said.

None of these problems, however, deter his organization from contending that massive restructurings of subprime loans are the best way to help people save their homes. Starting this week, NACA will launch workshops for loan restructurings in 40 cities, similar to the one held in Washington.

To ensure that the restructurings go through, NACA will supply borrowers with the phone numbers for their congressional representatives; for the CEOs of lenders and servicing companies, and for bank regulators. The group will encourage borrowers to share those numbers with friends, family members and neighbors, and apply pressure with phone calls, letters and visits to push for more mass restructurings, he said.

“We’re getting these done. But has it been a fight to get them done? Yes,” Marks said. “We’re going to force servicers to change the way they do business. They’re acting like they’re paralyzed. This is our way to force this issue.”

That even an organization like NACA, armed with money, staff and expertise, is facing problems getting mass restructurings done is an example of the magnitude of the mortgage crisis itself.

“Let’s face it,” said Kathleen Keest, senior policy counsel with the Center for Responsible Lending, a research group. “We’ve dug ourselves into a huge hole here.”

Cecala, of Inside Mortgage Finance, compares the lending industry’s avoidance of restructurings to that of a city waiting for a hurricane to hit, unprepared and without enough resources — just hoping the damage won’t be too severe.

“It’s sad to say,” he noted, “but things haven’t got bad enough for everyone in the industry to change their view.”

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