Obama Mortgage Aid May Be Extended to More Low-Income Borrowers

By Jody Shenn and Dawn Kopecki

Oct. 16 (Bloomberg) -- The Obama administration may adjust its mortgage-modification program to help lower-income Americans with housing payments deemed affordable under current standards, executives at the two largest loan servicers said.

The change would be meant to boost the amount of borrowers able to qualify, by allowing debt to be reworked for certain homeowners with mortgage bills already below 31 percent of their pretax incomes, Wells Fargo & Co.’s Mary Coffin and Bank of America Corp.’s Barbara Desoer said in interviews this week at a mortgage conference in San Diego. That’s the level loans get restructured to now in the program.

Officials are studying ways “to appropriately expand the universe of those who are eligible to more of those who are in a position of needing government help to get through temporary stress,” Desoer, the head of the Charlotte, North Carolina- based Bank of America’s home-loan unit, said.

The step is one of several under consideration or announced that would refine the $75 billion Home Affordable program in a bid to do more to reduce the 7 million looming foreclosures that Amherst Securities Group analysts say will probably renew home- price declines.

“Certainly there are circumstances where it probably makes sense” to cut payments to “extremely” low levels “but on the other hand, what else is the borrower spending their income on?” said Steven Horne, former director of servicing-risk strategy at Fannie Mae whose Carrollton, Texas-based distressed- loan specialist Wingspan Portfolio Advisors LLC focuses on loan workouts tailored to individuals’ circumstances.

Understanding the ‘Consequences’

“We do a lot of talking with borrowers and making sure they have thought through the consequences of their spending decisions: You want to do that and say, ‘Maybe you don’t need that third car,’” he said in an interview at the conference. “You can also get unintended consequences, which are now you get borrowers who think the ‘Mod Fairy’ is going to come every time they stop paying.”

Meg Reilly, a Treasury Department spokeswoman, declined to comment on the potential change. The administration’s program, unveiled in February as a bid to rework as many as 4 million loans, has resulted in more than 500,000 trial modifications.

“We are always examining possible ways to provide more families the opportunity to avoid foreclosure, but no program changes are imminent at this time,” she said in an e-mail.

Candidates for Aid

Some low-income homeowners and “fixed-income seniors” not now eligible for the program are unable to handle what would appear to be “reasonable housing expense” relative to their earnings because of the absolute level of both, Desoer said.

Coffin, head of servicing at San Francisco-based Wells Fargo, confirmed that the idea of helping them was among those being talked about by the government and banks. Others would target unemployed homeowners and those with “option” adjustable-rate mortgages, who may need servicers to be allowed to cut balances and grant interest-only periods on reworked debt, she said.

Coffin, whose company “would support the program” for lower-income borrowers, said she hadn’t heard of a particular debt-to-income ratio being yet under consideration. Desoer cited a ratio of 25 percent as a potential threshold.

Coffin dismissed complaints by mortgage-bond investors such as Larry Fink, chief executive officer of BlackRock Inc., that banks servicing loans they don’t own are reworking too many or changing them in the wrong ways because of their interests in seeing other debt such as home-equity loans repaid. The Mortgage Investors Coalition, a bondholder group, yesterday released a statement objecting to interest-only periods on reworked loans after JPMorgan & Co. raised the idea earlier at the conference.

“We’ve got our history, our reputation; it’s our fiduciary responsibility, it’s contracts,” Coffin said. “To say we’re just going to cast those away because we’ve got a home-equity book, it just doesn’t make any sense. It’s a great theory on their part but” it’s not true.

Together, Bank of America and Wells Fargo service almost $4 trillion of mortgages.

To contact the reporters on this story: Jody Shenn in San Diego at jshenn@bloomberg.net; Dawn Kopecki in San Diego at dkopecki@bloomberg.com

Last Updated: October 16, 2009 10:36 EDT