An organization of mortgage investors is calling for a new approach to foreclosure prevention, expressing a willingness to write off mortgage principal as part of a comprehensive approach to restructuring a consumer's entire debt load.

The proposal from the Association of Mortgage Investors (AMI) calls for sustainable debt solutions for homeowners in hardship situations, including writing down mortgage principal to reach a 97.75 percent loan-to-value ratio for refinancing into an FHA loan. Such a reduction would be tied to restructuring all other consumer debt, including a proportional reduction of secondary liens and reductions of auto loans and credit card debt as well.

"Homeowners need lasting solutions that put them on a clear path to affording their debts," read the proposal. "Anything less than this just prolongs their distress and the ultimate recovery of the U.S. housing market."

The proposal also calls for more transparency in the mortgage servicing process, saying that faulty

and inefficient mortgage servicing has harmed both investors and homeowners. It blames a "broken servicing model" for worsening the housing and mortgage problems affecting large parts of the U.S. population.

The AMI represents private investors, public and private pension funds and endowments that invest in mortgage securities. It expresses support for government efforts to help responsible, though financially distressed, homeowners avoid foreclosure.

The AMI proposal calls for allowing homeowners with a verified hardship to restructure their monthly housing expenses to a maximum 31 percent of their monthly income and limit total ongoing debt principal, including secondary liens, to no more than a 115 percent loan-to-value ratio in such cases.

It suggests that bankruptcy might provide a mechanism to ensure that all debt holders participate in such a solution, with mortgage investors agreeing to a "voluntary cramdown" - that is, reduction of principal - which would not require any changes to current law. Binding arbitration might be another option.

As for reforming the servicing process, the AMI says the current servicing model harms borrowers by assessing excessive fees during the loan modification process, fees that are eventually collected by the mortgage servicers themselves. It says that the full costs that might be incurred by a foreclosure should be disclosed to both investors and homeowners.

The report also urges that collections staff be limited to working with no more than 100-150 delinquent accounts per employee, and that delinquent borrowers be given a single point of contact to work with during the modification process.

The recommendations are contained in a short white paper, The Future of the Housing Market for Consumers After the Crisis, released this month by the AMI.

Published on January 22, 2011