Treasury is currently reviewing a proposal to aid distressed homeowners by allowing a short sale of mortgage notes from mortgage-backed securities (MBS) trusts to new investors.[IMAGE]
The proposal was set forth by Jordan D. Dorchuck, Esq., CMB, EVP, chief legal officer, and secretary of ""American Home Mortgage Servicing, Inc.,"":https://www.ahmsi3.com/servicing/home.asp based in Coppell, Texas, and written in collaboration with executives from WL Ross & Co. and Mortgage Banking Initiatives Inc.
Dorchuck says this strategy could be key to unlocking principal reduction modifications for struggling homeowners.
An estimated 3 million loans have been foreclosed in the last three years, and some analysts predict another 5 million to 7 million more foreclosures by the end of 2012.
As of February 2011, about 634,000 loans had been modified through HAMP.
""Without changes, the volume of foreclosures will continue to outpace the number of loan modifications,"" Dorchuck said in his white paper.
Dorchuck believes principal reduction modifications have the potential to reduce losses for both MBS investors and underwater homeowners.[COLUMN_BREAK]
""We note, too, that banks holding mortgage loans in bank-owned portfolios have been actively achieving this result by principal forgiveness,"" he states in the white paper.
Dorchuck does consider the risk of creating incentives for strategic default through principal reduction modifications. He believes these modifications should be designed with investor and servicer considerations in mind and not allow consumer-driven demand.
However, ""[f]rom the MBS investor perspective, market prices of their securities already reflect large foreclosure losses,"" the white paper notes.
""Short sales of mortgage loans should reduce those expected losses and achieve Ã¢â‚¬Ëœfinality,' quickly,"" it states. ""Hundreds of thousands of homeowners could potentially be helped with affordable loan modifications if they included responsible principal reduction components.""
According to the white paper, the plan lowers the risk of re-default and reduces foreclosure losses for MBS investors, while also benefiting borrowers by offering them a sustainable solution and a chance to stay in their homes.
""The Plan would create a win-win scenario,"" Dorchuck writes in the white paper.
Dorchuck's proposal is not the only plan currently being considered as an option to improve the housing market.
The Wall Street Journal recently reported that the Obama administration is considering several housing policy changes, including requiring Fannie Mae and Freddie Mac to loosen their stringent requirements for investors.
The possibility of the GSEs renting some of their REOs was also mentioned as a way to help stabilize prices.
Ed Delgado, former Wells Fargo executive and current CEO of the Five Star Institute told _The Wall Street Journal_ that renting is ""riddled with risk.""
""Essentially you're converting the [firms] from providing liquidity to a glorified national landlord for distressed assets,"" he told the _Journal_.