Monday, July 28, 2008

Servicers to ask for access to the discount window?

(Naked Capitalism) We've been told by mortgage counsellors involved in the Hope Now Alliance that servicers are hemmorhhaging cash, prime worse than subprime. Why? In default, servicers are required to advance the first 90 days of interest payments to the trust. Some agreements also require them to pay principal during that period. Even after the 90 days, the servicer has to continue to pay real estate taxes and insurance. The servicer can use any late payment or other penalties from the borrower to offset these costs.

The assumption was that if you were efficient at servicing, the overcollateralization would give servicers enough of a buffer to handle a reasonable level of defaults, But we are running vastly in excess of heretofore "reasonable" assumptions.

Here is the additional wrinkle from HousingWire:
The [housing] bill will not go into effect until October 1, and on Friday House Financial Services Committee chairman Barney Frank (D-MA) warned servicers that they needed to halt foreclosure activity on qualifying loans until the new laws became effective...

But... new housing bill wouldn’t like be effective until the middle of next year. A HUD spokesperson told American Banker that it was “absolutely totally unlikely” that the new program would be ready by October 1, noting the process HUD must go through to implement new programs — including determining underwriting standards for the new loan program the housing bill would create.

Without those standards, which could take through the end of this year to finalize, servicers will have nothing to go on in terms of refinancing troubled borrowers under the new program.

Which means two things: servicers choosing to hold off on even some foreclosures now in the hopes that they’ll be able to write-down, write-off and refinance certain troubled loans face the uncertainty of not knowing which loans will actually qualify, as well as the unsavory likelihood that they’ll be self-imposing a moratorium that could last much longer than 60+ days.

HW’s key sources have suggested that servicer advances are likely the most critical piece of the puzzle going forward, and that the housing bill — if anything — further puts pressure in this area.

“Servicers are being asked to put a voluntary moratorium on some unknown number of foreclosures, but nobody has addressed the servicer advances that must continue to be paid during this period,” said one industry consultant who asked not to be named. “And worse yet, nobody knows just how long servicers would need to keep advancing their money to a trust, since apparently there is a good chance the program wouldn’t be in place by October.”

A few servicing managers HW has spoken with have suggested that the only way many servicers can survive the current environment is by having access to the discount window or FHLB advances, to help keep servicing operations afloat — meaning that the servicing shop has to be within a bank, generally speaking.

And that’s exactly the sort of capital strain, BTW, that many of the nation’s already-limping banks can ill afford to take on right about now.
Let's face it. Barney Frank is one Congressman. He can bluster all he wants to about servicers needing to hold off on foreclosures, but his words have no legal standing (admittedly, if a lot of other Congressmen pick up on his theme, that's a different matter). And the vast majority of commentators see the bill as having perilous little impact.

However, Frank's push to hold off on foreclosures might give the servicers air cover to seek relief. Lord help us. Who isn't in line to get a bailout?

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