http://www.responsiblelending.org
Federal Responses to the
Foreclosure Crisis
Foreclosure Solutions ForumBaltimore Homeownership Preservation Coalition
April 21, 2009
Julia Gordon, Senior Policy CounselCenter for Responsible Lending (DC)
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Center for Responsible Lending
Nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices.
Affiliated with Self-Help, one of the nation’s largest community development financial institutions, which has provided over $5.6 billion of financing to low-wealth families, small businesses and non-profits through direct lending and a secondary market operation.
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Housing & Foreclosure Landscape
Foreclosures: 13 million defaults from 2008Q4 until 2014 More than 1 in 10 homeowners in trouble. Increasing Prime delinquencies: 4Q: 2.4% seriously
delinquent vs. 1.1% at the end of 1Q 2008. Nearly 1 in 5 homes underwater. $3+ Trillion in Credit Losses
Mortgage lending $1.61 trillion in 2008 vs. $2.65 trillion in 2007 Subprime market almost entirely gone
Home sales/construction Existing home sales dropped 24% New home sales & new construction starts dropped 54% &
58% respectively
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Existing Obstacles to Voluntary Modifications
Second Liens Pooling and Servicing Agreement
Limitations Insufficient Servicer Staffing Misaligned Financial Incentives for
Servicers Fear of Investor Lawsuits
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Quality Matters
OCC 4th Q 2008 Metrics: only 42% of 2008 mods reduced payments, 27% unchanged; 32% increased. (Other findings are similar)
Surprise! Mods w/ lower payments fare better. – Credit Suisse, Fitch, OCC 4Q Metrics: Dramatic
differences between loan mods that decrease payments and those that do not; greater reductions = greater success
– UNC Study: Reduction to affordable payments is key to sustainable loan modification
Early intervention pays off– Credit Suisse: mods at 0-59 delinq. Consistently
perform better than those at 60+
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Obama Refinance Plan
Program Benefit: Current borrowers can refinance into lower rate loans
Eligibility Owner-occupied property Owned or Insured by Fannie or Freddie (i.e., conforming
loan when made) Current on mortgage payments Refinance up to 105% of current value (increases
Fannie/Freddie 80% limits)
Projections Admin: 4-5 million refinances Mark Zandi (Moody’s economy.com): 4-5 million w/
aggregate reduction of $30 billion in mortgage payments
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Obama Modification Plan: Participation by Servicers
Participation not generally required Carrots/Sticks to encourage participation Federal regulators are encouraging licensees to
participate All or Nothing participation (whole portfolio)
Required For … banks that accept TARP money going forward Fannie/Freddie portfolio mortgages or MBS pool
mortgages guaranteed by Fannie/Freddie
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Obama Modification Plan: Eligibility
Broad Coverage Loan balance ≤ $729,750 (higher for 2-4 unit properties) Modification yields greater return than foreclosure In default or at imminent risk of default.
Qualified Borrowers First-lien, owner-occupied Document income, and sign affidavit of financial hardship
Narrow Window Loans originated on or before January 1, 2009. Now thru December 31, 2012 (one mod only per loan) Servicers have until Dec. 31, 2009 to sign on.
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Obama Modification Plan: Carrots
Servicer Incentives (after 90-day trial period): $1,000 for each modified mortgage + $1,000/ year for 3
years if borrower stays current $500 for modifications made prior to delinquency $250 + more tba by Treasury for release of 2nd lien Compensation for foreclosure alternatives (if mod not
possible): short sales or deeds-in-lieu Borrower Incentives: up to $1,000/year for 5 years for
current borrowers toward principal Lender/Investor Incentives:
Interest reduction subsidy $1,500 payment for pre-default modification delinquency and
payments to offset probable losses from home price declines
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Obama Modification Plan: Standardization, Affordability,
Transparency,
NPV Test: Modification returns > Foreclosure Recovery
Reduce Housing Payments to 31% of Income (shared with gov’t from 38%-31%)
Affordability Waterfall Interest Rate Reduction Term Extension Principal Forbearance: Balloon Payments Principal Reductions: Optional
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How Does Obama Plan Address Modification Obstacles?
Servicer Capacity and Incentives Monetary incentives Standardized processing
Risk of Investor Lawsuits Industry-wide standards to minimize uncertainty and
litigation risk Direct investor incentives: $ plus insurance against redefault
& falling home prices Stick: judicial modifications
Piggyback Seconds Incentive payments for release
Legislation Still Needed Safe harbor Judicial Modifications
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Lift the Ban on Judicial Modifications
Incentive to servicers/investors to modify outside bankruptcy
Level Playing Field for Primary Residence Mortgage Currently, allowed for 2nd homes, yachts, etc., but not for
primary residences
Zero cost to taxpayers Conservatively, could help 800,000 families keep
their homes Narrowly targeted; limited judicial discretion Structured to prevent attractiveness: can only be the
last option for homeowners; BK is “painful”
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Chairman Bernanke’s Conclusion
Federal Reserve Chairman Ben Bernanke:“Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower.”
(www.federalreserve.gov/newsevents/press/bcreg/bernankeregz20080714.htm)
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The “Originate to Distribute” Market Structure: Separating Actions From
Consequences
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Perverse Market Incentives
“The big demand was not so much on the part of the borrowers as it was on the part of the suppliers who were giving loans which really most people couldn't afford.”(Alan Greenspan to Newsweek, 9/24/2007)
“The market is paying me to do a no-income-verification loan more than it is paying me to do the full documentation loans … What would you do?”(CEO of Ownit Mortgage to The New York Times, 1/26/2007).
Why would lenders make unsustainable loans? “Because investors continued to buy the loans.” (Mortgage Bankers Ass’n Chief Economist to CNN Money.com, 2/20/2008)
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2008 HOEPA Regs:A Good Start; More is Needed
Requires ability to pay, limits prepayment penalties, requires escrow
Other important improvements regarding appraisal, advertising, servicing, early GFE
Applies only to subprime loans Not Payment Option Arms Not Interest-Only Loans
Does not ban Yield Spread Premiums Takes effect October 2009
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Mortgage Reform Legislation Pending in House of Representatives
(HR 1728)
Pros Narrower scope of “qualified mortgages” subject to safe
harbor presumptions Strong tenant protections Legal aid funding
Cons Failure to eliminate perverse market incentives
– Weak provisions (steering, YSP, PPP, duties); – Limited remedies
– cure requirement only– credit risk retention insufficient replacement for strong
provisions Still no accountability for Wall Street Preemption!
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Regulatory Reform
Enforcement of existing rules by existing agencies
Change in structure to avoid capture, regulator race to the bottom
Consider one agency for consumer protection (pros and cons)
Stop OCC, OTS interference with state consumer protection
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State Level Action
Foreclosure prevention legislation: Maryland is a leader
Mortgage origination laws: protect from federal undermining
Resources: How to maintain at a time of budget crisis?
Other?
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Contact
Julia Gordon
Senior Policy Counsel
Center for Responsible Lending
202-349-1878
www.responsiblelending.org