Investors Voice Support for Mortgage Writedowns

A group of mortgage investors is expressing their support for measures that would enable homeowners to reduce the principal on at-risk mortgages and is calling on the banking industry to join them.

The Mortgage Investors Coalition is urging that Congress enact legislation that would make it easier for financially distressed homeowners who are "underwater" in their mortgages to write off part of the debt and refinance into a new mortgage under the Hope for Homeowners program.

The group is calling upon the banking industry to support similar writedowns for second lien mortgages under the Hope for Homeowners program. The Mortgage Investors Coalition represents investors who are primarily invested in first lien mortgages.

The group appears to be motivated in part by concerns that modifications to the Hope for Homeowners program approved by the Senate on Wednesday increase the motivation for banks to modify, rather than write down and refinance, troubled mortgages.

A spokesman for the investors' group said they believe that refinancing are better for both the borrower and the investors.

"Even though they take a hit on the principal, it's a better product," said Micah Green, a partner with Patton-Boggs LLC in Washington, DC, who is representing the investor's group. He said marking down the principal and refinancing means the loan is much more likely to continue performing as opposed to a loan modification.

"The statistics on a straight modification are not encouraging," he said.

The investors group is asking the Congress implement rules for the Hope for Homeowners program that are similar to the newer Making Home Affordable program, which mandates that first and second liens be restructured in the same way.

Of the two programs, only Hope for Homeowners offers refinancing to homeowners who owe significantly more on their mortgage than their home is worth; Making Home Affordable offers loan modifications in that situation.

The Hope for Homeowners program offers incentives for lenders to write down the value of a mortgage where the homeowner is at risk or default and owes more than the home is worth, thereby allowing the borrower to stay in the home and the lender to avoid the cost of foreclosure while recouping at least part of the investment.

Originally projected to assist up to 400,000 homeowners when it was unveiled in October, the program has been largely spurned by banks due to red tape and liability concerns. It was recently reported that only 50 homeowners have been approved for refinancing under the program.

The legislation passed Wednesday by the Senate is intended to remove many of those obstacle and make the program more attractive to lenders. The Mortgage Investors Coalition is urging that rules on second lien writedowns be addressed in working out differences between the Senate bill and one already approved by the House.

Calls to several of the major banks that hold second liens were not returned; a representative of Citibank was reached but declined comment on the issue.