Tuesday, February 9, 2010

Mortgage Mess Breeds Unlikely Allies

Original posted in the Wall Street Journal by James R. Hagerty:

Bruce Marks, a community activist from Boston, has long denounced investors in mortgage securities as "predators," accusing them of exploiting poor people lured into unaffordable home loans. Lately, though, some of those investors have become allies in his battle to avert foreclosures.

As the mortgage crisis drags on, some activists and investors have formed a loose coalition to prod banks into sharply cutting the amounts owed by borrowers whose loans far exceed the depressed values of their homes. Principal reductions are the best incentive for such borrowers to keep making monthly mortgage payments, some activists and investors say.

Big banks, mortgage giants Fannie Mae and Freddie Mac and the Obama administration generally have resisted shrinking what borrowers owe, preferring to reduce interest rates to as little as 2% or extend payments to as long as 40 years. Treasury Department officials have worried that if some borrowers get their principals reduced, even borrowers who aren't behind will stop paying unless they get the same break.

The strange bedfellows pushing for more principal reductions point to some scary numbers. According to real-estate data firm First American Core Logic Inc., about one-fourth of U.S. households with a mortgage were "under water"—or owed more than their homes were worth—as of Sept. 30.

[MORTGAGE] Andy McMillan

Activist Bruce Marks, above last March, has worked to avert foreclosures. Another activist, below, wore his slogan on his shirt at a mortgage-restructuring event last fall.

[MORTGAGE] Getty Images

Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP, estimates 7.1 million of the 7.9 million households now behind on their mortgage payments will lose their homes to foreclosure if nothing is done to change current loan-modification programs. "Principal reduction is the only answer," she says.

Mr. Marks says mortgage-bond investors like Pacific Investment Management Co., or Pimco, a unit of Allianz SE, are "on the same page we're on." That is a significant change of tune by the well-known activist, who is chief executive of a Boston nonprofit group called Neighborhood Assistance Corp. of America. NACA counsels struggling mortgage borrowers.

Last year, Mr. Marks argued that investors were blocking loan modifications. He put a bright-red label that said "predator" over a picture of Pimco co-founder Bill Gross on NACA's Web site.

Mr. Marks also threatened to send bus-loads of protesters to bond manager Pimco's headquarters in Newport Beach, Calif. Pimco headed off the protest by inviting Mr. Marks in for a chat with Pimco Chief Executive Mohamed El-Erian and other senior executives. Mr. Marks came away persuaded that banks, not investors, are dragging their feet on loan modifications.

Working With Wall Street

Scott Simon, a Pimco managing director, has recently participated with the activist in Washington meetings about loan-modification snarls. "They help a lot of people," Mr. Simon says of NACA's borrower-counseling services.

Other activists also have noted the convergence of their views with those of investors. "We will work with Wall Street" or anyone else who favors "effective" loan modifications that reduce principal balances, says John Taylor, CEO of the National Community Reinvestment Coalition, which includes more than 600 community groups.

Investors in mortgage securities already have had to mark down their holdings to the distressed levels prevailing in the market. Reducing principal on the loans backing those securities probably wouldn't require any further write-downs to their holdings. Many investors favor reducing principal in a way that would allow the loans to be refinanced into smaller mortgages insured by the Federal Housing Administration. Refinancing would trigger cash payments to holders of the securities as old mortgages are paid off at a discount.

Banks' Conundrum

It is more complicated for financial institutions. U.S. banks, thrifts and credit unions held about $952 billion of home equity and other junior-lien mortgages as of Sept. 30, according to Federal Reserve data. If the principal owed on first mortgages is reduced, the institutions probably would have to write down or write off many of the second-lien loans, potentially sapping their capital.

Even so, some banks seem to be warming to the idea of principal reductions.

"Everybody's realizing there is a place for principal reductions to a much greater extent than before," says Jack Schakett, a senior Bank of America Corp. executive involved in loan workouts.

At Wells Fargo & Co., though, Mike Heid, co-president of the home-mortgage unit, says principal reductions raise a "fairness issue." If you are paying your mortgage on time and see your delinquent neighbor rewarded with a smaller loan balance, "why wouldn't you be entitled to one, too?" he asks.

Treasury officials have said they are considering how to deal with deeply underwater borrowers. "Negative equity is a big challenge," Seth Wheeler, a Treasury official, told investors at a conference last week.

Investors aren't united on the best way to modify loans. Many investors like the idea of refinancing borrowers into smaller loans. But BlackRock Inc., a major mortgage-bond investor, is pushing the controversial idea of letting bankruptcy judges restructure shaky mortgages. The company wants to require that judges wipe out credit-card debt and second liens, mostly held by banks, before touching the first liens often held by investors.

'Give a Little'

Micah Green, a partner at law firm Patton Boggs LLP who represents some large investors in mortgages, says BlackRock`s idea is good in principle but may not be politically feasible given bank lobbying. Banks, which have been offered Treasury incentives for easing the terms on second liens, should work with investors to help put consumers into "new, properly sized'' loans, Mr. Green says. "Everybody's going to have to give a little for it to work," he says.

Ms. Goodman says regulators may need to allow banks to recognize losses on second-lien loans over an extended period of time to avert a disastrous immediate hit to their capital levels.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.