This blog post describes the implications of the recent US loss mitigation experience for housing reform

McCoy, Patricia A.

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Boston College Law SchoolDigital Commons @ Boston College Law SchoolBoston College Law School Faculty Papers1-10-2015What Loss Mitigation Taught Us About HousingFinance ReformPatricia McCoyBoston College Law School, patricia.mccoy@bc.eduFollow this and additional works at: http://lawdigitalcommons.bc.edu/lsfpPart of the Administrative Law Commons, Banking and Finance Commons, and the HousingLaw CommonsThis Article is brought to you for free and open access by Digital Commons @ Boston College Law School. It has been accepted for inclusion in BostonCollege Law School Faculty Papers by an authorized administrator of Digital Commons @ Boston College Law School. For more information, pleasecontact nick.szydlowski@bc.edu.Recommended CitationPatricia McCoy. "What Loss Mitigation Taught Us About Housing Finance Reform." Housing Perspectives (2015).Tuesday, January 13, 2015What Loss Mitigation Taught Us About Housing FinanceReformFrom time to time, Housing Perspectives features posts by guest bloggers.Today's post was written by Patricia McCoy, Liberty Mutual InsuranceProfessor, Boston College Law School, and former Assistant Director forMortgage Markets, Consumer Financial Protection Bureau.Since 2007, the federal government and servicers have groped towardstriking the right balance between cost-effective loss mitigation andunavoidable foreclosures for homeowners with delinquent home mortgages.Among other things, this painful experience resulted in a cornucopia ofdata about the right way and wrong way to do loss mitigation. Nevertheless, none of the leadinghousing finance reform proposals has incorporated these lessons. Take, for example, theJohnson-Crapo bill, which was the leading reform contender and made it to the Senate floor.That bill would vaguely require servicers to establish “loss mitigation options that seek toenhance value” but says nothing about the best way to do so. That oversight is unfortunatebecause it sets us up to repeat the mistakes of the past.First, some history. Eight years ago, the federal government became focused on foreclosureprevention as mortgage delinquency rates began to spike. The George W. Bush Administrationsought to achieve that goal through moral suasion and voluntary compliance by servicers underthe aegis of HOPE NOW. Later, the Obama Administration turned up the heat by offering acarrot and a stick: a carrot consisting of the HAMP Program, which paid servicers to grant loanmodifications when doing so would increase recovery, and a stick through rulemakings andenforcement. One of the results was a rich trove of data on what makes loss mitigation work andwhy.So what did we learn? I address this question in some detail in a chapter in the Joint Center’slatest book, Homeownership Built to Last, but here are a few quick takeaways:1. Standardized decision tree, or “waterfall,” such as that employed by HAMP to lowermonthly payments, is key to minimizing default rates (by cutting the interest rate or, ifnecessary, reducing principal).2. Foreclosure prevention is more successful the sooner it is granted after a homeowner’sfirst delinquency – ideally within two to three months.3. The federal government should offer meaningful relief to people who are temporarilyunemployed and need help making their mortgage payments until they get back on theirfeet.These three techniques are a win-win for distressed homeowners and for investors by avoidingneedless foreclosures while maximizing investor recovery.But there’s one final lesson that is directly relevant to housing finance reform. We can’timplement lessons one through three unless we remove servicer barriers to effective foreclosureprevention. In 2007 and 2008, the private-label mortgage-backed securities market collapsed andthat market remains moribund today. In the aftermath, servicers rushed to foreclosure in toomany cases, saying that pooling and servicing agreements with investors (PSAs) tied theirhands. Investors disputed those claims, complaining that the PSAs did not in fact bind servicers’hands and that foreclosure prevention would have enhanced recovery in many of those cases. After that sour experience, investors will not be eager to rush back to the private-label marketunless loss mitigation rules give them stronger protections. It is important, going forward, thatby Patricia McCoyGuest BloggerHarvard Joint Center for HousingStudiesDrawing from the ongoing research andanalysis of the Harvard Joint Center forHousing Studies, Housing Perspectivesprovides timely insight into current trends andkey issues in housing. We dig deeper into thehousing headlines to discuss critical issuesand trends in housing, communitydevelopment, global urbanism, andsustainability. Posts are written by staff of theJoint Center, drawing from their wide-rangingknowledge and experience studying housing.We hope you will follow Housing Perspectives,and we welcome your comments.View my complete profileAbout* indicates requiredReceive our newest blog posts inyour inbox.Email Address* Follow by RSS▼  2015 (9)►  February (4)▼  January (5)New Report: U.S. Home ImprovementIndustry Outpace...What Effect Will Lower FHA MortgageInsurance Prem...Growth Slowing in Home Remodeling in2015 (+ New R...What Loss Mitigation Taught Us AboutHousing Finan...11+ Million Undocumented Immigrants inthe U.S. Co...►  2014 (44)►  2013 (45)►  2012 (17)Blog ArchiveSearch This BlogSubscribe to: Post Comments (Atom)Newer Post Older PostHomePosted by Harvard Joint Center for Housing Studies at 9:28 AM Labels: foreclosure, GSEs, HAMP, homeownership, mortgage finance, policyPSAs in future deals give servicers no excuse to deny loan modifications that will increaseinvestor recovery vis-à-vis foreclosure. Since PSAs are privately negotiated, the only real way toassure that is to prescribe standard loss mitigation protocols and require PSAs to follow thoseprotocols in any housing finance reform law that Congress enacts. The protocols should requireservicers to evaluate loan modification requests by distressed borrowers using a standardizedwaterfall that is designed to reduce monthly payments to an affordable target level. Under thatwaterfall, servicers should attempt to attain the target payment level first through interest ratereductions and then, if need be, through principal reductions. The statutory protocols should alsoset time limits for loan modification decisions to help encourage early intervention. With theseprotocols in place, we can help avoid the experience in recent years where useless foreclosurespushed down home prices and delayed the economic recovery.  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What Loss Mitigation Taught Us About Housing Finance Reform

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