Dear readers, I had wanted to go through the geeky American CoreLogic Mortgage Resets study, which gives mind-numbing detail on what type of mortgages reset when to come up with a more refined guesstimate of how many borrowers might be eligible for the formerly-Paulson, now Administration subprime program.
The Administration claims its program could help as many as 1.2 million borrowers, or two-thirds of the subprime cohort. That number sounds like pure PR. . The Greenlining Institute pegs the percentage of subprime borrowers who would qualify at only 12% (240,000); the Center for Responsible Lending estimates only 145,000 would benefit.
But further analysis of the numbers will have to wait. I wanted to address one topic now, which is whether the plan could be successfully challenged by unhappy investors. My reading is yes. Why do I think so? Beyond the fact that lawyers are very clever and there are doubtless some flies in the ointment, there is at least one obvious basis for attack. The American Securitization Forum, one of the key members of the so-called New Hope Alliance, has, in endorsing this plan, done a 180 degree turn its recommendations fo industry standards for loan mod procedures, and in a short period of time to boot.
Tanta at Calculated Risk’s argued that the plan was awfully convoluted and accomplished comparatively little because it was designed not to run afoul of current agreements (note that there is no “safe harbor” or other legislation proposed by the Administration to shield mortgage servicers, the ones who would be making the loan modifications). But the American Securitization Forum may be hoist on its own petard.
Please note very carefully what I am saying here. I am not predicting whether investors will sue; that depends upon whether they think the plan will have an adverse impact on them, and whether it is big enough to merit the cost of filing a suit. They may have very good legal grounds but may feel it’s not worth the bother.
The other notion to understand clearly is what I mean by “successfully challenge.” I am not predicting that a plaintiff will win in court; 95% of lawsuits are settled and never reach trial. But one can prevail either by stopping or limiting behavior one doesn’t like, or by achieving a reasonable negotiated settlement.
How do those things happen? In all candor, it does not depend entirely on the merits of one’s case. It depends on being able to mount an argument that is strong enough to survive a motion for (that is a merits of the case issue). Then the outcome can be significantly influenced by how costly, unpleasant, and embarrassing one can make the discovery process. Success in litigation often depends on the pain one can inflict on one’s opponents. For example, if you have legitimate reasons to depose senior executives of your opponent’s important clients, and the line of questioning would make them uncomfortable or better yet, damage the relationship with your opponent, that alone might lead to settlement negotiations.
A quick reading of the documents at the American Securitization website on the subprime plan suggest some clear avenues for a suit. And I am sure clever attorneys who had access to the servicing agreements could come up with much better and more specific ideas. Any lawyers or investors who have litigation experience are particularly encouraged to weigh in.
The plan goes to some effort to camouflage the elephant in the room, namely, the American Securitization Forum’s repudiation of its former position. Let’s first review the basic parameters. Michael Shedock has at his site, which is a bit faster than . I’ve simplified this a bit but it’s pretty faithful:
Borrowers who are deemed to be “eligible to refinance into other products,” aka Segment 1, are out for the most part, although the servicers can include them on a case-by-case basis. Having a FICO of over 660 or a LTV or CLTV better than 97% puts you in this group. Borrowers also must be current, which means presently not more than 30 days past due and at most over 60 days past due only once in the last 12 months (under the Mortgage Bankers Association definition, not more than 90 days past due more than once). The homeowner must not be eligible for FHA Fast Secure and must occupy the house (determination based on borrower’s representation).
Segment 2, the so-called “fast track,” will have FICOs of less than 660, LTV higher than 97% . Borrowers whose FICOs have improved 10% fail the FICO test (as do ones whose FICOs are greater than 660) but can be evaluated on a case-by-case basis.
Segment 3 are the bottom tier, not eligible for fast track, but still may be able to get a conventional mod (in theory, of course).
Now to the fun part. In June 2007, the American Securitization Forum, which was depicted in the press as a representative of investors in the New Hope Alliance (in fact, its members include issuers, rating agencies, financial intermediaries, guarantors, law firms, accounting firms, so it would hardly seem able to represent any one group) published a “Statement of Principles, Recommendations and Guidelines for the Modification of Securitized Subprime Residential Mortgage Loans” (starts on page 18 of this :
For borrowers that are eligible for a fast track modification, the fast track option is non-exclusive and does not preclude a servicer from using an alternate analysis to determine if a borrower is eligible for a loan modification, as well as the terms of the modification.
This raises the possibility that the servicers might not offer “one size fits all” mods after all. As the :
Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said in response to questions about the use of credit scores as a screening device that the plan would be undergoing “further refinements”.
It will be interesting to see whether that turns out to mean they will flesh out the many yet unclear procedural details, or will wind up beating a retreat on some of the initial parameters.