A top Democrat wants to give the Federal Housing Administration authorization to provide an additional $300 billion in mortgage guarantees to help refinance up to 2 million loans in cases where lenders agree to "substantial" principal write-downs.
A bill proposed by Rep. Barney Frank would require that lenders — or the investors who hold the rights to service a mortgage — agree to write-downs large enough to insulate FHA from losses and provide a "meaningful reduction" in a troubled borrower’s monthly payments.
According to a summary of the bill released by Frank, D-Mass., the write-downs would have to be large enough to bring the loan-to-value ratio on the new, FHA-backed loan, to no more than 90 percent of a property’s current appraised value. Lenders would be limited to recovering no more than 85 percent of the property’s current value as payment for the existing loan, allowing FHA to establish a 5 percent loan loss reserve.
The chairman of the House Financial Services Committee thinks lenders might agree to such terms in cases where they would face greater losses by foreclosing on a home. Mortgage note holders would be able to walk away with a cash payment and no further credit exposure to the borrower.
To be eligible, borrowers would have to live in the home to be refinanced, and the existing loan on the property originated between Jan. 1, 2005, and July 1, 2007. To remove the incentive for borrowers to purposely default, they would have to have a mortgage debt-to-income ratio of no less than 40 percent as of March 1, and certify they have not intentionally defaulted on existing mortgages.
To further prevent "borrower flipping," the FHA would hold a "soft" second lien, requiring the borrower to pay a 3 percent exit fee or relinquish all or part of their profits when they sell their home or refinance a loan.
The bill would create an oversight board to develop a system for refinancing loans on a bulk basis, with lenders and servicing submitting competitive bids for delivery of restructured loans for insurance by FHA.
The National Community Reinvestment Coalition last week proposed a similar plan, endorsed by the U.S. Conference of Mayors, in which the Treasury Department would buy up loans at steep discounts, which would be sold back to private market investors.
The NCRC’s three-year "HELP Now" program would not require the creation of a new agency, and because it doesn’t involve FHA, taxpayers are not on the hook for losses, proponents said.
But the FHA is already a major component of the Bush administration’s foreclosure relief efforts. The administration created the new FHASecure loan program to help borrowers in risky loans — including homeowners with adjustable-rate mortgages who have defaulted because of an interest-rate reset — refinance into more affordable loans.
In a conference call with reporters Friday to discuss HUD’s new proposed mortgage disclosures, Federal Housing Commissioner Brian Montgomery said the FHASecure program has helped about 120,000 homeowners since mid-September, and is on track to assist 300,000 refinancings by year end.
Montgomery said the recent, temporary increase in FHA loan limits in the economic stimulus bill will give 250,000 additional homeowners to FHA loan guarantee programs.
Asked about Frank’s bill, Montgomery said "there are all sorts of options being floated" for further expansion of FHA loan guarantee programs. "We are exploring other options of our own, and we’ll have more to say about that in the next few weeks," Montgomery said.
Frank released draft language for his bill, the FHA Housing Stabilization and Homeownership Retention Act, but said it could change before it is formally introduced.
The Mortgage Bankers Association issued a statement saying any such plan should be voluntary and not increase costs for future borrowers. Lenders should assume their share of the loss to avoid a "government bailout," the MBA said, and the program should not assist borrowers who engaged in fraud.
MBA Chairman Kieran Quinn said it’s also crucial that any plan includes protections for servicers and trustees who could face lawsuits from investors in mortgage-backed securities if they engage in loan modifications governed by pooling and servicing agreements.
A bill that would provide a legal safe harbor for mortgage servicers was introduced last week by Rep. Mike Castle, R-Del., and Paul Kanjorski, D-Penn.
HR 5579, the Emergency Mortgage Loan Modification Act of 2008, is a substitute for a bill Castle introduced last November, HR 4178.
At a December hearing by the House Financial Services Committee, FDIC chairman Sheila Bair said HR 4178’s goal of encouraging loan modifications was "laudable," but said the bill might be challenged on Constitutional grounds on the basis that it overrides existing contracts (see Inman News story).
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