By Joseph Tomkinson
The mortgage-backed securities problem began with rising subprime delinquencies and spread to more traditional mortgages.
The primary reason for the delinquencies was exotic mortgages with unreasonably low initial rates. As mortgages reset at higher rates, homeowners fell behind on payments and were forced into foreclosure.
Since many mortgages where sold to investors as securitizations, there is little that can be done to help borrowers as securitization trustees must abide by terms of contracts that governed the deals.
Trustees only are allowed to collect upon existing mortgages and pay the proceeds to the trust and its investors who bought loans packaged as securities.
They may be forced to foreclose upon delinquent borrowers and sell houses, or in some cases to modify the mortgages,but only for the existing homeowner and only to a limited extent.
But trustees are not allowed to substitute mortgages to new borrowers or substitute properties for existing mortgages.
Any solution to the current mortgage crisis must be based upon the nation’s objectives, as stated by the Treasury Department:
– Stabilizing housing prices.
– Ensuring mortgage availability.
– Protecting the interests of the taxpayer.
Existing mortgage-backed securities have already funded existing borrowers. As delinquencies rise, the value of the trust securities is impaired. Securities are generally held by banks and other institutional investors, such as insurance companies, municipalities, pension funds and mutual funds.
With tight credit markets, it would seem natural to use securitizations currently in place to finance both delinquent borrowers and new borrowers.
Modifications to the securitization trust agreements would allow borrowers, investors, servicers, insurers and original issuers to have the capital markets finance mortgages and not the government.
Investors would agree to accept a delay in the return of capital by agreeing to the modification or issuance of a new mortgage, rather than a foreclosure, in exchange for recouping losses at a later date. This simple adjustment should protect the taxpayer from a huge drain on the nation’s resources.
There are two key parts to the plan.
Modifications:
Allow delinquent borrowers to exchange existing upside appreciation in their properties for reduced loan balances and interest rates. If an existing mortgage exceeded the value of the property and the ability of the borrower to make current payments, the mortgage could be re-underwritten and modified such that the borrower could meet his obligations while still being committed for his original amount through a second mortgage payable upon sale.
Substitutions:
Allow a new qualified buyer to be substituted on a foreclosed property or a delinquent mortgage without seeking new financing. The buyer would finance the property with the trust by having the trust issue a new mortgage to the new buyer. The trust securities already have money invested in the property. The new borrower is required to make a down payment on the purchase of the home, which is paid to the trust resulting in a better position for the investors.
The results could be:
– Borrowers could stay in their homes, have upside potential and rebuild equity in their homes.
– Investors could improve cash flows and participate in home appreciation to reduce previous losses.
– Servicers could reduce advances and improve cash flows.
– Insurers could reduce losses through future home appreciation.
By reducing delinquent mortgages and foreclosed properties, the market will stabilize and homeowners will remain in their homes, preventing neighborhoods from falling into disrepair.
The government can play a critical role in the implementation of the solution to this problem by:
– Changing laws to allowing trustees and servicers to implement these changes.
– Assisting the multiple parties needed to amend the securitization trust agreements and the servicer agreements.
– Establishing underwriting guidelines upon which trustees would rely to ensure that modifications and substitutions are in the best interests of the security holders.
– Establishing guidelines for the issuance of second mortgages to allow shared appreciation mortgages into the trust so that trusts would not be subject to adverse equity ownership or tax consequences.
Resulting losses or gains from mortgage modifications and substitutions would end up where they should be, i.e., with the borrowers, investors, insurers and issuers, not the taxpayer.
Tomkinson is chairman and chief executive of Irvine-based Impac Mortgage Holdings Inc., a mortgage investor and services company.
