Loan Mods, Legacy Assets take Forefront at Securitization Gig

Regulatory reforms is reaching nearly all aspects of the securitization market, yet the government lags on clearer legislation for mortgage financing reform, said analysts at Information Management Network’s ABS East gathering in Miami yesterday. George Miller, executive director of the American Securitization Forum said that future legislation should prevent bad loans from being written and second, in the vent that they do occur; legislation should be in place in order to provide assistance to these loans. Miller said that lending should not be extended without demonstrating the ability to repay. Going forward the market is likely to see significant focus on remedies and greater liability for lending activities. These future requirements are likely to cure the bad loan situation. Legacy assets will also continue to have limited outlets for disposal. Speakers at the conference questioned whether there would ever be a vibrant secondary market for anything other than the plainest vanilla assets. “The legacy asst program for PPIP is meant to facilitate price discovery for a healthy functioning secondary market,” said Matthew Bass, program director for legacy securities PPIP at the US Treasury. “Since announcing the program we have seen an improvement in liquidity and we’ve seen an increase in re-remics and seasoned loans traded – this is all important toward improving the secondary market.” (For a full update on PPIP, please see the November issue of HousingWire) Stephen Kuddenholdt, co-chair of the capital market practice at Sonnenschein, Nath & Rosenthal said that the government modification program has also worked toward stabilizing the market. So far the program accounts for 63 servicers, which is roughly 88% of the servicing market. “This means that the accounting impediments have been resolved and the safe harbor has improved enough to make the industry feel protected,” he said. “The market has always had loan modifications but it was a hand crafted cottage industry. Now it’s the way you identify borrowers in default or those that are about to.” Investors can then, after a binary test is concluded, decide whether the loan modification is better or worse than foreclosing. But the significant issue of forbearance remains an obstacle for loans within a securitization pool. The Treasury’s guidance states that forborne principal should be treated as a realized loss “unless otherwise directed by the applicable PSA. This requires the servicer to turn to the PSA to determine if principal forbearance can be treated as a realized loss. And principal forbearance is not enumerated as a realized loss in the PSA, as it was not contemplated as a loss mitigation technique at the time the PSA was written.” But some investors are still reluctant to readily adapt the guideline set by the Treasury. If losses on the forborne principal are not realized until the payment comes due, the junior tranches are not written down, and will receive cash flow if there are sufficient funds. Alternatively, if forborne principal is taken as a realized loss when the loan is modified, the junior tranches are written down more quickly. Panelists said they expect Treasury to revise implementation guideline that drives its forbearance stance and sets better guidelines for investors. “Another question is why HAMP doesn’t direct forgiveness instead of forbearance,” suggests Kuddenholdt. “There is a strong line of thinking out there that believes borrowers won’t really benefit from a forbearance because it still keeps them feeling underwater.” Going forward, it likely that future securitization transactions will include detailed loan modification guideline and Kuddenholdt said it was likely that the market would borrow the HAMP guideline as a template on which to base future provisions. Write to Jacob Gaffney.