Bush administration officials outlined to lawmakers steps they are taking to help troubled homeowners avoid foreclosure, responding to criticism that the government’s response to the credit crisis favors banks and financial institutions.
At a congressional hearing Thursday, the heads of the Federal Deposit Insurance Corp., Federal Housing Administration and the Federal Housing Finance Agency detailed approaches the government, banks and mortgage financiers Fannie Mae and Freddie Mac are taking to negotiate workouts with troubled borrowers or refinance them into more affordable loans.
The Treasury Department outlined plans to use its authority to issue up to $700 billion in new debt to purchase troubled assets from banks to begin buying mortgage-backed securities and whole mortgage loans. The Treasury has come under fire from some quarters for first embarking on a $250 billion "recapitalization" of banks through the purchase of preferred stock.
Sen. Chris Dodd, D-Conn., voiced reservations about how banks will use that investment.
"It is beyond troubling to read in recent news reports that those lenders who will be receiving billions of dollars from U.S. taxpayers are considering using those dollars not to make loans, but rather to pursue ‘some acquisition opportunities’ and to create a capital ‘cushion’ on which they will comfortably sit while the American consumer and small-business person struggles," Dodd said.
Dodd, the chairman of the Senate Banking Committee, presided over a hearing in which FDIC Chairwoman Sheila Bair said the government could provide lenders with an incentive to modify the loans of troubled borrowers by agreeing to guarantee payments.
Bair said the Emergency Economic Stabilization Act, which created the $700 billion troubled asset repurchase program (TARP), gives the Treasury the authority to use loan guarantees and credit enhancements to facilitate loan modifications to prevent foreclosure.
The government could establish standards for loan modifications and provide guarantees for loans meeting those standards, she said, adding that the FDIC is working "closely and creatively" with Treasury on such a program.
Since placing IndyMac Bank in conservatorship July 11, the FDIC has determined that two-thirds of the 60,000 mortgages serviced by IndyMac that are seriously delinquent or in default may be eligible for modifications.
Bair said that while more than 15,000 loan modification proposals have been mailed to borrowers, it’s still early in the process and only 3,500 have accepted to date. Among those who have accepted, the modifications have reduced borrowers’ monthly payments by more than $380 on average.
FHFA Director James Lockhart — whose agency placed Fannie Mae and Freddie Mac in conservatorship on Sept. 6 — said the companies have engaged in 130,971 workouts through August, including 36,847 loan modifications.
The 4,606 loan modifications a month Fannie and Freddie are averaging so far this year represents a 60 percent increase from 2007. On the loss mitigations the companies have done so far, Lockhart said 92 percent of borrowers have been able to keep their homes.
Fannie and Freddie have added employees to assist in the "shops" where the loans they guarantee are serviced, and contracted with solicitors who go door-to-door to talk with borrowers directly. The companies have increased incentive payments to servicers for loan modifications, from an average of $450 to $750, he said.
Federal Housing Commissioner Brian Montgomery said FHA servicers have completed more than 100,000 loss mitigations in 2008, and that over the long run 87 percent are expected to continue making payments and stay in their homes.
He also said nearly 400,000 homeowners have taken advantage of the FHASecure program, created in August 2007 to help borrowers with adjustable-rate mortgages refinance into more affordable government-backed fixed-rate loans.
Montgomery said the new HOPE for Homeowners program, which was launched Oct. 1, probably won’t begin guaranteeing loans before the first of the year. It’s been estimated that program, which limits refinance loans to 90 percent of a homes currently assessed value, could help about 400,000 homeowners refinance. The actual number may depend on how many mortgage holders are willing to accept writedowns.
The government will also have an opportunity to engage in workouts and loan modifications when it starts purchasing mortgage-backed securities and whole mortgage loans under the TARP program.
Assistant Treasury Secretary Neel Kashkari, who’s been charged with implementing the TARP program, said the Bank of New York Mellon is working to design reverse auctions of mortgage-backed securities and expects to hire asset managers within days. He said plans to purchase whole mortgage loans are also moving forward, with asset managers to be hired "very soon."
When the Treasury purchases mortgages and mortgage-backed securities, Kashkari said, "we will look for every opportunity possible to help homeowners."
The Treasury Department has hired Donna Gambrell, former deputy director of consumer protection and community affairs at the FDIC, as interim "chief of homeownership preservation."
In the private sector, Montgomery said 27 of the nation’s largest mortgage companies are using guidelines drawn up by the Bush administration’s HOPE Now coalition of loan servicers and investors. The participating companies service about 90 percent of all subprime loans, he said.
HOPE Now’s members have reworked nearly 2.3 million loans since July 2007, Montgomery said.
Critics say efforts to provide refinancing and engage in workouts with troubled borrowers are still not keeping pace with the rise in delinquencies and defaults. As home prices continue to fall, more borrowers are left without equity in their homes, which makes it difficult to refinance or even sell if they are unable to make loan payments.
First American CoreLogic is projecting 3.2 million pre-foreclosure and foreclosure filings this year, and warns that recent announcements of job losses could push that estimate up (see story).
Presidential candidate John McCain, R-Ariz. has proposed that the government buy $300 billion in mortgages directly from mortgage servicers. The plan has been lambasted by critics in both parties because, unlike the HOPE for Homeowners expansion of FHA loan guarantees, lenders wouldn’t be required to write down the principal of loans that were refinanced (see story).
Some Democrats, including presidential candidate Sen. Barack Obama, D-Ill., want to grant bankruptcy judges the power to modify the terms of the mortgage on a bankrupt borrower’s primary residence.
The mortgage banking and financial industries have fought "cram downs," saying they would make investors wary of securities that fund mortgage lending, and raise the cost of borrowing for all homebuyers by 1.5 percent or more (see story).
Cram down supporters — including Mark Zandi, chief economist of Moody’s Economy.com and an informal advisor to the McCain campaign — say there would be little or no impact on interest rates, because bankruptcy judges would be given the power to modify existing nontraditional and subprime mortgages, but not loans made in the future.
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