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FEATURE SECONDARY MARKET percent after five years. Worse yet, 54 percent of the loans in default during the current crisis have no loss mitigation solutions attempted at all. In a congressional report on March 11, 2011, from the Committee on Financial Services, it was stated that only 521,630 loans have been permanently modified of the 1.47 million trial modifications in HAMP's two years of exis- tence. This is a far cry from the predicted 7 million to 9 million homeowners the administration predicted to help. One of the solutions recom- mended is principal reduction to help borrowers afford their homes. Many have been voic- ing the call for principal reduc- tion, including Congress and the Obama administration, putting pressure on the acting director of the Federal Housing Finance Administration (FHFA), Edward DeMarco, to change the policy of Fannie Mae and Freddie Mac to allow principal write-downs. The drawback, according to some in- dustry observers, is that principal reductions create a "moral haz- ard," in effect rewarding borrow- ers who may have overextended themselves without considering the consequences of taking on such monumental debt. The moral hazard component "Halting the downward spiral of foreclosures, falling house prices, and deteriorating household spending . . . More aggressive principal reduction programs for homeowners and stronger intervention by the government housing finance agencies." — Christine Lagarde, International Monetary Fund include "more aggressive prin- cipal reduction programs for homeowners [and] stronger intervention by the government housing finance agencies." hasn't prevented some highly in- fluential and highly visible econo- mists from advocating for the reduction of individual mortgage debt. In August 2011, Christine Lagarde, incoming managing director of the International Monetary Fund (IMF), nailed it when she called on the U.S. to take action, "halting the down- ward spiral of foreclosures, falling house prices, and deteriorating household spending." Lagarde suggested such measures could Not Everyone Should Be Saved P complex and involves political, legislative, and economic reform on a national level that will re- quire years of study and debate. But let's face it: Not everyone should be saved, and we should be focusing our attention on the ones who can and taking utting solutions in place to address the entire crisis is our lumps on the ones who shouldn't. We know that many borrowers could not afford the loan they were given; some were not really owner-occu- pants, many did not put any of their own money down—they had no "skin in the game—and that the stated income loans were appropriately referred to as "liar loans." The data is proving this point allowed all of this to take place. Hopefully, these issues are be- ing addressed by the previously mentioned legislative reforms. That said, it makes sense that what we are seeing is the inevi- table, healthy pain that comes from not going to the gym for the last 10 years. We let this body get very fat and unhealthy, and it's going to hurt to get it back in shape. Concentrate on What Has Worked and Apply Appropriately S ducing higher success rates of modifications: with the lackluster results in loss mitigation efforts to date, despite the amount of money thrown at the problem: $940 million for HAMP as of February 2011. These lending programs were designed by greedy origination brokers generating commissions, backed by legislative changes that are outperforming GSEs, HAMP, and securitized loans and can be attributed to lenders having the freedom to negotiate harder with the borrowers without the constriction of red tape from government programs or GSEs. Unfortunately, foreclosure delays due to additional compliance requirements with the consent orders, GSE-mandated foreclo- sure moratoriums, and a myriad of investigations, and audits from every direction have severely hindered the mortgage servicer's ability to implement what would have been a temporary staff ad- justment to handle the increased volume in their default opera- tions. securitized loans. Portfolio loan modifications loans, meaning non-GSE or non- 1. Office of the Comptroller of the Currency. February 15, 2012. www.occ.gov/topics/consumer-protection/foreclosure-prevention/correcting-foreclosure-practices.html. 2. Agarwal, Sumit Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, Douglas D. Evanoff. Market-Based Loss Mitigation Practices for Troubled Mortgages Following the Financial Crisis. October 2010. 3. Bachus, Spencer, Chairman. The HAMP Termination Act of 2011. Committee on Financial Services. Washington, D.C.: House of Representatives, 2011. 4. Ibid. 5. Agarwal, Sumit, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, Douglas D. Evanoff. Market-Based Loss Mitigation Practices for Troubled Mortgages Following the Financial Crisis. October 2010. 6. Office of the Comptroller of Currency (OCC) required 14 of the nation's largest mortgage servicers to sign a consent order—an agreement to conduct a multifaceted, independent review of its operations (Office of the Comptroller of the Currency 2012). 76 | THE M REPORT tudies have proven that there are three factors pro- 01 Privately held portfolio SECONDARY MARKET ANALYTICS SERVICING ORIGINATION