Countrywide, a leading player in subprime lending, has announced that it may modify terms on as much at $16 billion worth of loans before the end of 2008.
I am enough of a skeptic about Countrywide to wonder what this move really signifies. However, the stock market seems to be taking the program at face value, since the Bloomberg story reports that the stock fell by 2.7%. Loan modifications are a better option for both the borrower and investors than foreclosure when the borrower has enough income to make lower payments. However, in this scenario. Countrywide is the loan servicer, and for them, more mods is more work for no more pay.
From Bloomberg:
About 52,000 customers who hold subprime loans can refinance into prime and government-backed loans, the Calabasas, California-based company said today in a statement. Such loans usually carry lower rates. Terms will be eased for another 30,000 who may fall behind or have already missed payments when their adjustable rates rise.
Treasury Secretary Henry Paulson last week called the housing slump “the most significant current risk to our economy” and urged lenders to modify and refinance more loans. Countrywide has been the target of protests by housing advocates who say the company has done little to help homeowners with overdue payments or to halt foreclosures, which set a record in the U.S. during the second quarter.
“This is a big step,” said Bruce Marks, chief executive officer of Neighborhood Assistance Corporation of America. “Countrywide sets the standard for servicing and how lending gets done.” The Boston-based advocacy group has demanded Countrywide make loan modifications easier. The company’s willingness to cut interest rates without penalty payments is a welcome move, Marks said….
“None of our subprime borrowers that have demonstrated the ability to make payments should lose their home to foreclosure solely as a result of a rate reset,” David Sambol, the company’s president and chief operating officer, said in the statement.
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How can CFC modify loans they do not own? Once they are sold in a CDO, don’t the rules prohibit any modifications?
Yes they can change what they wown but that is a very small part of the mortgage universe.
You are correct that any mortgage servicer is restricted in what it can do by the servicing agreement, and by the fact that under the servicing agreement, its responsibility is only to the investors. However, past experience has shown it is often better for the investor to keep the borrower alive if he can make payments than to foreclose.
Some servicing agreements prohibit mods entirely; some limit them to a certain level; others give the servicer freedom to enter into mods that aren’t effectively refinancings (you don’t want servicers encouraging borrowers to refinance in a falling interest rate environment).
I don’t know what restrictions CFC puts in its servicing agreements and how often they have been renegotiated by issuers.
Given CFC;s past behavior, I am skeptical as to CFC’s motives. I suspect this is more a PR ploy than a serious effort.
could this explain cfc’s motives? — “it has to do with the fact that recoveries on subprime loans are far worse than ever anticipated so far.”
if so, it seems to me that the problem is even worse than commonly imagined.