Some Lenders Endorse Sub-Prime Re-fi Principles

The Mortgage Bankers Association and several large mortgage lenders have agreed to endorse a set of principles for working with troubled borrowers drawn up by the Senate Banking Committee.

The principles include making early contact with holders of adjustable-rate mortgages who face interest-rate resets, and working to modify loan terms where feasible to prevent defaults and foreclosures.

The principles are the product of an April 18 Homeownership Preservation Summit convened by Senate Banking Committee Chairman Sen. Chris Dodd, D-Conn. The committee invited consumer and civil rights groups, along with the largest subprime mortgage lenders, to put forward proposals to stem the rise in delinquencies and foreclosures in subprime loans.

In addition to the Mortgage Bankers Association, lenders endorsing the principles include Citigroup, JPMorgan Chase, Litton Loan Servicing, HSBC, Bear Stearns, Freddie Mac, Fannie Mae and the Self-Help Credit Union. Consumer and civil rights groups endorsing the principles included the Leadership Conference on Civil Rights, AARP and the Association of Community Organizations for Reform Now (ACORN).

"The crisis affecting the subprime market is a comprehensive one, and involves many parties," Dodd said in a statement. "It cannot be solved overnight, and cannot be solved by one party acting alone. Each party needs to do its part in helping to address this problem. The companies and organizations that endorse these principles demonstrate their commitment to being part of finding solutions to foreclosures."

Countrywide Financial Corp. and Wells Fargo & Co. attended the summit but did not endorse the principles, which include:

• Early contact and evaluation: Servicers should try to contact subprime ARM borrowers before their interest rates reset to determine whether they can afford the higher payments. If it's clear that they won't be able to make the payments, the servicer can assume a default is likely, and decide whether to modify the loan terms.
• Loan modification: When loan servicers are considering modifying loan terms to avoid default, the goal should be a permanent solution, sustainable for the life of the loan, rather than deferring the rate reset. Modifications could include switching the loan from an adjustable to a fixed-rate loan; reducing the interest-rate factoring in debt-to-income ratio, taxes and insurance; reducing principal; reamortizing a loan to make payments more affordable; and the creation of escrows to make tax and insurance payments.
• Staffing up: Servicers should adopt policies that allow large numbers of loan modifications to be done quickly by dedicated teams. Where possible, servicers should partner with third-party counselors and nonprofits for their outreach.
• Low-cost refinancing: Eligible borrowers should have the option to refinance to prime loans quickly and affordably.
• Credit availability: Government-sponsored entities -- Fannie Mae, Freddie Mac, and Federal Home Loan Banks -- should work with lenders to make credit available on affordable terms through new products and expanded programs.

With some of the largest sub-prime lenders declining to participate, the impact of these 'principles', which do not have the force of law, appears to be minimal, although I suppose that many lenders and loan brokers will use this as a fig leaf to hide behind as a more widespread correction of past excesses in the mortgage market spreads.