BofA breaks logjam, signs up for piggyback loan modification program

Here's hoping that lenders are just as much as lemmings as other businesses and join Bank of America in signing up for modifying 'piggy-back' loans as part of President Obama's $75 billion foreclosure prevention program. This is a big step in preventing foreclosures, as these lenders have traditionally been stuck in second place behind first mortgages and didn't want to take huge losses on short sales. From BuilderOnline.com:

Mortgage companies are finally starting to sign up for a long-delayed piece of the Obama administration's $75 billion foreclosure-prevention program.

The administration had been offering lenders who made so-called "piggyback" mortgages - second loans that allowed consumers to make a little or no down payment - incentives to lower payments or eliminate the loans entirely.

But no one signed up until Tuesday when Bank of America became the first to do so.

During the housing boom, lenders readily gave such second loans. While home prices soared, such mortgages were even extended to borrowers with poor credit and people who didn't provide proof of their incomes or assets.

Those loans are now an obstacle to alleviating the housing crisis. That's because piggyback lenders - fearing they won't be repaid - can veto a borrower's efforts to modify their primary mortgage..

If more lenders follow Bank of America it could clear the way for more mortgage companies to cut borrowers' principal balances on their primary loans. But administration officials appear wary of subsidizing such reductions with taxpayer money.

That could spark a backlash from critics who claim it's unfair to people who are still paying their mortgages on time and a bailout for banks that made reckless loans.

With foreclosures still at record-high levels, The Obama administration's program to aid homeowners has been a disappointment. Only about 66,500 borrowers, or 7 percent of those who signed up, had completed the program as of December.

The Treasury Department plans later this week to announce a streamlined process designed to get more borrowers to complete the loan modification program. The program reduces mortgage rates to as low as 2 percent for five years.

But many experts say more dramatic changes are needed.

"Unless you modify principal, there is absolutely no hope of restructuring mortgages on a mass scale to keep people in their homes," Daniel Alpert, managing director of the New York investment bank Westwood Capital LLC said earlier this month. "Eventually their hand will be forced."

Will 2009 be the year of mortgage cram-downs?

The pressure to allow bankruptcy judges to modify loans on principal homes is continuing to grow as voluntary measures by lenders to make existing mortgages more affordable to homeowners in arrears is continuing to build. With the new Obama Administration taking office in just a few weeks, pundits are thinking that allowing judges to make these modifications -- including 'cramming' down the principal and forcing lenders to take the loss -- will be part of the next stimulus plan. From a Wall Street Journal story:

In a cram-down, a judge modifies a loan, often reducing principal so a borrower can afford it. Lenders hate it because they have to absorb the loss. Bankruptcy judges currently have the ability to modify certain personal loans and even mortgages on vacation homes, but they can not cram-down mortgages on primary residences.

Even staunch opponents acknowledge that mortgage cram-downs for primary residences are likely to be as part of Congress's economic-stimulus package in early 2009. The National Association of Home Builders used to reject any bill with a cram-down provision outright. Now it is saying the measure is worth a look...

The latest embattled foreclosure-prevention program is Hope for Homeowners, which was approved by Congress last summer and supposed to help 400,000 homeowners. Only 357 people have signed up so far for the voluntary program. The Department of Housing and Urban Development, which is administering the program, acknowledges that it has been encumbered by high fees and narrow eligibility requirements.

Another government program, FHASecure, was intended to help 80,000 homeowners who had fallen behind on their payments after their adjustable interest rates reset. It has helped only 4,100 delinquent borrowers refinance since September 2007 and will stop taking new loan applications as of Wednesday.

Mortgage lenders also are modifying tens of thousands of loans without government help. But often this hasn't solved the problem. A report last week by the Office of the Comptroller of the Currency and the Office of Thrift Supervision found that nearly 37% of mortgages modified in the first quarter of 2008 were 60 days or more delinquent after six months.

"It is absolutely clear that voluntary modification is just not working," says Rep. Brad Miller, a North Carolina Democrat. "Every plan that Congress has passed, we do it and nothing happens."...

Proponents of bankruptcy reform also note that millions of troubled loans aren't being addressed by current modification programs because they were carved up and sold to investors as securities. Mortgage servicers have been reluctant to aggressively modify these loans because they have been unsure of their legal rights.

The mere threat of mortgage cram-downs could break the standoff between mortgage servicers and mortgage investors, which has slowed aggressive loan modifications. Investors may be more willing to go along with industry-driven modifications when facing the threat that a judge could ultimately order the amounts of loan principals reduced, forcing them to eat bigger losses...

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