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Federal Responses to the


Federal Responses to the Foreclosure Crisis Foreclosure Solutions Forum Baltimore Homeownership Preservation Coalition April 21, 2009 Julia Gordon, Senior Policy Counsel – PowerPoint PPT presentation

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Title: Federal Responses to the


Federal Responses to the Foreclosure
Crisis Foreclosure Solutions Forum Baltimore
Homeownership Preservation Coalition April 21,
2009 Julia Gordon, Senior Policy Counsel Center
for Responsible Lending (DC)
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 nations
    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.

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
  • 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

Maryland Foreclosure Picture (based on data from
3Q 2008)
2nd Wave Alt-A and Option ARMs
  • Performance Across Loan Products

Whats Being Done About It?
Existing Obstacles to Voluntary Modifications
  • Second Liens
  • Pooling and Servicing Agreement Limitations
  • Insufficient Servicer Staffing
  • Misaligned Financial Incentives for Servicers
  • Fear of Investor Lawsuits

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

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 (Moodys economy.com) 4-5 million w/
    aggregate reduction of 30 billion in mortgage

Obama Modification Plan Participation by
  • Participation not generally required
  • Carrots/Sticks to encourage participation
  • Federal regulators are encouraging licensees to
  • 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

Obama Modification Plan Eligibility
  • Broad Coverage
  • Loan balance 729,750 (higher for 2-4 unit
  • Modification yields greater return than
  • In default or at imminent risk of default.
  • Qualified Borrowers
  • First-lien, owner-occupied
  • Document income, and sign affidavit of financial
  • Narrow Window
  • Loans originated on or before January 1, 2009.
  • Now thru December 31, 2012 (one mod only per
  • Servicers have until Dec. 31, 2009 to sign on.

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
  • 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

Obama Modification Plan Standardization,
Affordability, Transparency,
  • NPV Test Modification returns gt Foreclosure
  • Reduce Housing Payments to 31 of Income (shared
    with govt from 38-31)
  • Affordability Waterfall
  • Interest Rate Reduction
  • Term Extension
  • Principal Forbearance Balloon Payments
  • Principal Reductions Optional

How Does Obama Plan Address Modification
  • 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

Lift the Ban on Judicial Modifications
  • Incentive to servicers/investors to modify
    outside bankruptcy
  • Level Playing Field for Primary Residence
  • 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

Chairman Bernankes 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/b

The Originate to Distribute Market Structure
Separating Actions From Consequences
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 Assn Chief Economist to CNN
    Money.com, 2/20/2008)

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

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!

Regulatory Reform
  • Enforcement of existing rules by existing
  • 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

State Level Action
  • Foreclosure prevention legislation Maryland is a
  • Mortgage origination laws protect from federal
  • Resources How to maintain at a time of budget
  • Other?

Julia Gordon Senior Policy Counsel Center for
Responsible Lending Julia.Gordon_at_responsiblelendin
g.org 202-349-1878 www.responsiblelending.org
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