Fixing Foreclosures: Lots Of Plans, Murky Strategy
Next: Hope for Homeowners
Hope For Homeowners
This program was hastily conceived in the summer of 2008 and, as virtually all admit, has been a stunning failure since its launch Oct 1, 2009.
As of Feb 3, there have been 451 applications and only 25 loans have closed, while the FHA has taken insured no loans under the program, according to the congressional testimony of the program’s executive director Meg Burns, who oversees its day-to-day operations.
“A this stage in the mortgage crisis, program standards that effectively shut out large numbers of families in trouble may only perpetuate the foreclosure crisis,” Burns told Congress.
House Financial Services Chairman Barney Frank (D-Mass) has engineered a significant overhaul of H4H, containing more liberal and less costly eligibility requirements for borrowers as well as more favorable terms for lenders and the firms that service loans.
One important change raises the maximum loan to value, LTV, ratio from 90% to 93% for borrowers above a 31% mortgage debt to income ratio, which reduces the write down lenders have to take.
The assessment in and out of government is positive.
“The new improved terms will eliminate a lot of constraints that made it unattractive to borrowers and lenders," says Columbia Law School professor Edward Morrison, who recently testified before Frank’s panel. “But that’s not the case for taxpayers.”
That’s because the new terms eliminate government profit-sharing of appreciation over market value of the home at time of refinance, reduce participation fees and waive key documentation requirements such as two years of tax returns.
“The program is still quite complicated,” says Tomasz Piskorski of the Columbia Business School.
Piskowski, Morrison and Christopher Mayer, a vice dean at the business school, are pushing a plan they co-authored; it calls for subsidized interest rates as well as financial compensation and legal protection for loan servicers, which they estimate will prevent a million foreclosures alone at a cost of $10.7 billion.
Morrison says H4H needs more explicit legal protection for services written into it, rather than have it contained it a companion bill.
Though most say H4H has been vastly improved, analysts say a fundamental flaw remains—that lenders must initiate the process.
The single most important thing is that you make it that the borrowers ask for help, not the lenders,” says Pollack.
Bankruptcy Cram Down
For more than a year, Sen. Richard Durbin (D-Ill.) has been pushing so-called “cram down” legislation, which essentially allows homeowners to avoid foreclosures by modifying mortgages through bankruptcy court.
The legislation would essentially let borrowers modify their loans through the Chapter 13 bankruptcy law. Judges could lower the interest rate reduce the principal, change the length of the mortgage or any combination of the three assuming the bowers can prove they tried to renegotiate with the lender.
Though it has some support in Congress and consumer groups, most in the legal and lending business adamantly oppose it.
The biggest concern is that it empowers judges to invalidate contracts, which some say will prompt lenders to add a risk premium to loan rates.
There’s also a more immediate practical concern.
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“Whatever else it does it will overwhelm the bankruptcy system,” says Pinto, echoing a common concern.
The cram down gained momentum recently when Citigroup broke ranks with the rest of the industry and agreed to support the idea, but that was seen as a necessary concession given its reliance on government aid.
Opponents say the bankruptcy court approach may appear to be less costly and promise a greater chance of success but that is deceptive.
“The cram down is very destructive in that consumers can be misled mislead and think, “All I have to do is file bankruptcy,’” says Courson of the MBA.
“About two-thirds of chapter 13s fail some point into the repayment plan, default and become chapter 7 liquidation, “ says Morrison
The chapter 13 approach would also entail a big reduction in principal at the beginning based on the home’s current value, which analysts say makes it less attractive to lenders.
Opponents, however, say the cram down model may work for a small group –people without savings, but they worry that it will compete with more conventional programs such as H4H and pit borrowers vs. lenders.
“You would hope banks would want to dump mortgage for an immediate payout versus chapter 13, which means years of payment.
What Now?, What Next?
Durbin’s cram-down bill as well as Frank’s H4H revamp may wind up in an omnibus-spending bill Congress could take up soon.
Frank Wednesday asked top banking industry CEOs to impose a moratorium on foreclosures ahead of the Obama administration foreclosure plan due in about two weeks.
Treasury Secretary Geithner and other administration officials met with mortgage industry representatives Wednesday to begin discussion of possible tools and measures, according to an industry source.
That is widely expected to contain some measure to lower mortgage rates, whether through a government subsidy or indirect pressure on market rates. Some say it may also have to address foreclosure mitigation for under-water homeowners. About one in five are thought to hold mortgages worth more than the price of the home.
An interest-rate reducing mechanism—pushing rates on a 30-year mortgage to 4 to 4.5 percent on a 30-year—has been long awaited and would highly welcome in the real estate industry, but only the most optimistic think it will make much of a difference.
Some say time is clearly running out.
“This is tough stuff, “ says Courson. “It’s chewed up time.”