by Tanta on 5/06/2008 08:08:00 AM

Wherein voluntary non-binding criteria are established in order to forestall actual regulation. No, really. Saith the WSJ:

Officials have called a six-hour meeting Tuesday with banking officials to discuss adopting a uniform, but voluntary, set of criteria to speed the time it takes qualified borrowers to modify mortgages they can't afford. Officials also want to make the modification process more consistent across institutions. . . .

The new industry guidelines, if adopted, wouldn't be binding and couldn't be enforced by the government. But, if effective, they could help forestall aggressive action from congressional Democrats, who have lashed out at loan servicers for acting too slowly and threatened to push tougher oversight of the banking industry if results don't improve. . . .

One possible industry "best practice" would have lenders acknowledge the receipt of any request for a modification within five days of a request by homeowners. Some struggling homeowners have complained that it takes two months or longer to hear back from lenders. Also, the companies are considering a policy that would direct lenders to notify borrowers of a decision about whether to modify a loan within five days.

Another tricky issue slowing loan modifications has been the conflict between companies that hold the first and second mortgage on the same home. Treasury officials are also trying to broker a truce between these groups that would make it easier for borrowers with two mortgages on one home to modify the terms of their loans. . . .

Loan servicers are also looking for clarification about the role of Fannie Mae and Freddie Mac. The two government-chartered mortgage companies made it easier for lenders to modify the terms of certain qualified loans, such as the interest rate. But they have been stricter about writing down mortgage principals [sic], saying they will generally do so only on a case-by-case basis.

Let's see. Kicking out a form letter within five days to acknowledge the request? That's easy enough; servicing systems are superb at kicking out form letters. What will it say, other than "we got your request"? Until we finally work through this business about "across the board" versus "case by case" processing of these deals, putting a hard and fast timeline on them seems like a problem to me.

If you think there's one consistent mechanical approach that works for any and all loans and borrowers, and you assume that the hold-up is lack of direction from management, then all we need is for the mechanical process to be laid out and the big guys meeting with Treasury to come back to the office and hand out the memos to everyone.

If you think, as I do, that the vast majority of these things have to work on a case-by-case basis, and the hold-up is lack of senior loss mitigation staff who can manage cases all the way through with enough time in their day to take phone calls directly from borrowers in the process, plus the problem of first mortgage loss mit people trying to get somewhere with the second lien people, then we need to be setting "best practice" standards for how and with whom these loss mit departments are staffed at both shops (first lien and second lien).

Furthermore, I really don't see the point of continuing to talk about first mortgage servicers agreeing to do principal write-downs until we have talked more seriously than I have heard heretofore about what junior lien servicers are going to do, exactly, and how they're going to do it. I keep seeing plans--this includes Frank's FHA plan as well as Sheila Bair's "HOP" proposal--that go into great detail about the first lien holder writing down principal but just kinda mention junior liens as an afterthought. Practically speaking, this isn't doing anyone any good: first lien holders can "voluntarily" agree to do just about anything, but if the second lien holders don't agree to modify, subordinate, or charge off and release their liens at the same time in the same time-frame, the whole thing is pointless. But the economics of the two parties are very different: second lien lenders, by and large, don't have big loss mit staffs. You can't afford to on a second lien, not the way the business model of second lien lending was written in the recent past. If you're looking at 100% loss in a foreclosure, but only 110% loss if you spend a lot of time and money negotiating with a first lien lender who ends up pressuring you into charging off the loan anyway, you gain most by doing exactly nothing.

This is not a sympathy trip for second lien lenders; it's a reality trip. Unless this great summit meeting at the Treasury comes up with a public answer to what the second lien lenders are expected to do, and how they're expected to do it, this isn't going to work. Even with Barney Frank issuing none-too-subtle threats:

In a speech to the Mortgage Bankers Association in Boston, House Financial Services Committee Chairman Barney Frank (D., Mass.) warned Monday that if the industry doesn't do more to avert foreclosures, "you're going to see a much tougher set of rules" on mortgage lending emerge from Congress later. He said such changes would be "politically irresistible" if foreclosure problems continue to build up.