Most servicers and bondholders tend to agree that modifying default and delinquent loans is preferable to foreclosure, especially in light of current real estate prices. However, some are executing on these plans more quickly than others.
The answer may lie in the underlying capitalization of the servicers more so than resource and near-term cost issues. Many servicers are more concerned with liquidity than earnings in this environment.
At the recent meeting on July 27 between Treasury and the major servicers, some servicers indicated that while the $1,000 incentive for servicers was admirable, the delay in resolution caused by the Government’s modification process and trial period put a great burden on the servicers to fund higher advances.
The government will pay servicers $1,000 for every loan modified, and another $1,000 a year for three years if the borrower stays current. However, these servicers indicated that this is outweighed by the cost of the advances on the delinquent payments.
The group has asked for help in funding these temporary advances that are fully reimbursed when a loan is modified or foreclosed through the Fed's Term Asset-Backed Securities Loan Facility (TALF,) which allows for the pooling of advances for sale to investors.
While there are other issues at play, including the rating of the TALF debt, the conclusion should be pretty clear. Those with sufficient advance funding facilities are able to finance the debt outside of the TALF and execute on Government and their own modification programs. Some examples appear to be the major banking players such as Wells Fargo and Chase and the better capitalized servicers such as Ocwen. Those that do not have adequate credit facilities in place are still trying to find a way to access the TALF at reasonable prices.
What they are saying is that they need working capital financing at reasonable prices to be able to accomplish this. Are they really positioning for bailout money in the form of low priced loans? This seems logical. One fact is clear. If the servicers run out of cash, the implications and complexities are mammoth.
NEXT UP: BEST PRACTICES FOR LOAN RESOLUTION AND MODIFICATION
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Great points! For this program to work, the incentive from the program must outweigh the servicers' increased cost of advances that results from the delay in foreclosure. In other words, the current plan is only effective when the servicer believes their borrowing cost for delaying foreclosure will not exceed $1,000 for the 20%-50% of mods that eventually fail.
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