Connecticut Gov. M. Jodi Rell wants to know how bad the subprime mortgage problem is in Connecticut. She announced last week that she’s forming a task force of bankers, regulators and real estate officials to look at what will likely be a growing problem here. There are about $8.1 billion in subprime loans currently outstanding on Connecticut properties. Nearly 10 percent of those loans are past due affecting thousands of homeowners. Determining the exact number of potential foreclosures in Connecticut will be part of the task force’s charge.
Yet as lawmakers and regulators try to help strapped homeowners with “subprime” mortgages stave off foreclosure, they face an unexpected hurdle: Wall Street.
Millions of subprime loans, which are higher-priced loans to borrowers with impaired credit, aren’t held by the initial lenders. Instead, most U.S. mortgages are now put into trusts, repackaged as bonds and sold to market investors.
That can make it more difficult for borrowers to restructure their loans.
Against The Rules
In many cases, trust rules bar servicing firms that administer the mortgages from modifying them, according to the Mortgage Bankers Association. In others, servicers can follow standard industry practice, which the group says can spell legal trouble if market investors protest.
Some servicers have modified trust conditions, with the consent of bondholders. But because bonds can be sliced and diced into various offerings, getting consensus can be tough.
“We have consumers calling and saying, ‘My neighbor across the street was able to [get] forbearance for four months while he found a job,’ while they can’t,” says Marietta Rodriguez, director of housing services at non-profit NeighborWorks. “One potential lender could have a dozen different security instruments [with] different terms.”
Robert Pulster, executive director of Boston nonprofit ESAC, says when working with borrowers it can be hard to figure out who owns a mortgage, let alone what changes might be possible.
“It’s very difficult,” Pulster says. “You could talk to [a servicer] for several weeks and not get an answer.”
Competing Interests
Servicers are caught between legal documents and a “huge wave” of consumer advocates, lawmakers and others talking about changing the rules “to force them to do something that might be contrary to what these documents are telling them,” says Diane Pendley, a managing director of Fitch Ratings.
Pendley says mortgage-backed securities issued in the past several years generally give servicers a lot more flexibility to keep a borrower in a home. Still, changes can have a negative impact for investors. “It changes the cash flow. … It’s a scary subject to some because deals used to be so specific,” she says.
The Federal Reserve is looking at the issue.
“We’re very concerned about keeping people in their homes,” Federal Reserve Gov. Randall Kroszner said. “The Fed is assessing the incentives in the contracts and the structure of the contracts and how covenants and requirements vary.”
State and federal lawmakers have been seeking ways to help borrowers, including bailouts, now that 14.4 percent of adjustable-rate subprime loans are delinquent. Market complexity could affect efforts. For example, some mortgages assess penalties for paying off a loan early. The so-called prepayment penalties may be difficult to deal with depending on how the bond is structured.
“If the thought is that there can be a simple law passed or regulation instituted that would affect everything equally, that’s probably an unrealistic hope,” says Doug Duncan, chief economist of the Mortgage Bankers, which plans a meeting of lenders, consumer groups and other parties on the issue.
