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Wednesday, February 20, 2008

STATE OF THE MORTGAGE MARKETS IN 2008: What Mortgage/Capital Market Participants Can Expect Next and What One Might Need to Do if Litigation Occurs. Wednesday, February 20, 2008.

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Wednesday, February 20, 2008

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  1. STATE OF THE MORTGAGE MARKETS IN 2008:What Mortgage/Capital Market Participants Can Expect Next and What One Might Need to Do if Litigation Occurs Wednesday, February 20, 2008

  2. Secondary Market Implications, Likely Litigation and Other Controversies for Loan Modifications under the ASF/ Treasury Plan Daniel G. Murray

  3. Part I: American Securitization Forum “ASF” • Industry-developed, “recommended” framework for securitized subprime servicers to fulfill existing obligations and maximize recoveries on loans for the benefit of investors. • ASF estimates 1.2 million subprime adjustable rate mortgages (ARMs) are expected to be eligible for fast track refinancing or loan modification under the ASF Framework. • Targets ARMs approaching first reset between January 1, 2008 and July 31, 2010. • Servicers are “encouraged” to apply the ASF Framework, but are not “obligated” to.

  4. Part I: American Securitization Forum “ASF” • Non-Binding: Individual loan servicers, pursuant to their obligations under existing contracts, decide which borrowers will receive assistance. • “In implementing this statement, each servicer will not take any action that is prohibited by the pooling and servicing agreement or other applicable securitization governing document.”

  5. Part I: American Securitization Forum “ASF” • Examples of Standard Servicing Agreement Modification Provisions • Type 1: Servicer may waive, modify or vary any term of any Mortgage Loan or consent to the postponement of strict compliance with any such term or in any manner grant indulgence to any Mortgagor if in the Servicer’s good faith determination such waiver, modification, postponement or indulgence is not materially adverse to the interest of the Certificateholders, including, but not limited to, a modification that would extend the term of any Mortgage Loan with an original term to maturity of less than 360 months to 360 months, or a modification that would convert the adjustable Loan Rate to a fixed Loan Rate.

  6. Part I: American Securitization Forum “ASF” • Type 2: The Servicer may not (a) permit modification or modify any loan to change the Mortgage Rate, reduce or increase the principal balance or change the final maturity date of the loans (unless mortgagor is in default or default is reasonably foreseeable); or (b) permit modification or modify, waive or amend any term of the loans that would both (i) effect an exchange or re-issuance of such loan under Section 1001 of the Code (or Treasury regulations promulgated thereunder) and (ii) cause any Trust REMIC to fail to qualify as a REMIC under the Code or the imposition of any tax on prohibited transactions or contributions after the startup date under the REMIC provisions.

  7. Part II: Summary of Recent Loan Modifications • No hard data has been released on the number of subprime borrowers that have actually received help from the rate-freeze programs under HOPE NOW and the newly created Project Lifeline. • In the second half of 2007, the industry assisted an estimated 869,000 prime and subprime loans and, coincident with the formation of HOPE NOW, the loan modification rate in the fourth quarter doubled over the rate in the third quarter.

  8. Part II: Summary of Recent Loan Modifications • Only 150,000 of the 545,000 subprime loan work-outs were true loan modifications. Repayment plans, accounted for 72% of the work-outs. • Despite claims that HOPE NOW has helped roughly 545,000 subprime borrowers during the second half of 2007, 33% more people actually lost their homes than in the first six months of the year.

  9. Part III: Increased Loan Limits Under the 2008 Economic Stimulus Plan Act • GSE Loan Limit Increases • Temporary Increase in GSE Conforming Loan Limits • Before Increase- Fannie Mae and Freddie Mac were only able to purchase loans under $417,000. • For areas where 125% of the median house price is less than or equal to the GSE limit, the GSE limit is set at, and can go no lower than, the GSE limit of $417,000. • For high cost areas where the calculation of 125% of the median house price exceeds the GSE limit the new GSE limits are calculated based on 125% of the area median house price up to 175% of the GSE limit or $729,750.

  10. Part III: Increased Loan Limits Under the 2008 Economic Stimulus Plan Act • Intended Effect on Secondary Market: Temporary Increase in GSE Conforming Loan Limits • Loans with balances above the prior limit currently have few buyers, even when financial institutions are willing to make these loans, there is currently a limited secondary market for them and it is difficult for them to be sold to fund new loans. • Allowing the GSEs to buy these loans infuses liquidity into the mortgage market.

  11. Part IV: Project Lifeline • Aimed at homeowners who face the risk of foreclosure but have not addressed the problem. • Borrowers who are more than 90 days behind in their mortgage payments and face imminent loss of their homes. • Applies to all types of mortgages, not just subprime loans. • Homeowners that have filed for bankruptcy, have a foreclosure date within 30 days, or have a mortgage covering vacant property or a vacation home are ineligible for Project Lifeline assistance. • Initiative between major companies including: Bank of America, J.P. Morgan Chase, Citigroup, Coutrywide, Washington Mutual and Wells Fargo and the United States government.

  12. Part IV: Project Lifeline • Works in conjunction with the HOPE NOW program, and the toll free help-line for mortgage and foreclosure counseling. • Project Lifeline facilitates mortgage companies informing homeowners to call their loan servicer and provide financial information in exchange for a 30-day halt in foreclosure proceedings and an opportunity to negotiate friendlier mortgage terms.

  13. Part V: Short Sales and Loan Repurchase Disputes • Servicers have been using short sales (selling mortgage property for less than outstanding principal balance of mortgage loan in lieu of foreclosure or other remedy such as deed-in-lieu of foreclosure.) • Short Sales are a loss mitigation strategy that provides an alternative to the costly foreclosure process. • In our experience, there has been a recent surge in the number of requests and disputes of loan repurchase obligations for loans purchased in the secondary market.

  14. Legislative Developments and Regulatory Enforcement Travis P. Nelson

  15. Legislative Developments • Mortgage Reform and Anti-Predatory Lending Act (H.R. 3915) – Frank • Homeownership Preservation and Protection Act (S. 2452) – Dodd • Other Pending Federal Legislation • Bankruptcy Code Bills: Specter and Durbin • Significant State Legislation

  16. Regulatory Enforcement • Federal Bank Regulatory Agencies • Securities and Exchange Commission • Justice Department/FBI • State Regulators

  17. Questions? For more information, visit www.pepperlaw.com

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