$300 billion FHA rescue saving literally DOZENS from foreclosure

Remember the big housing rescue bill that Congress passed and Bush signed int law in July? That bill, The Housing and Economic Recovery Act of 2008, contained a program called Hope for Homeowners that was supposed to keep 400,000 families out of foreclosure by allowing homeowners on the brink to refinance into a 30 year fixed rate FHA-insured loan for 90% of the current appraised value of the home.

A brief review of the program: Homeowners only qualify if they can prove they can't afford their existing payment based on their income and meet certain other requirements. Also, homeowners agree to forfeit to the government 50% or more of any profits realized when the home is sold or the mortgage is refinanced in the future. The program is voluntary for lenders-- the existing lienholder must agree to accept the proceeds of the new loan as payment in full-- almost certainly a loss for them, but perhaps more than they would get from a foreclosure sale after their expenses.

Congress authorized the FHA to insure up to $300 billion in mortgages under this program. This was supposed to make a significant dent in the foreclosure crisis. The author of this measure, Chris Dodd (D-CT), said on the Senate floor on June 24th that this would "put a tourniquet on the hemorrhaging of foreclosures".

Well, since the program started on October 1st, there's been a grand total of 79 loan applications under the Hope for Homeowners program. If every one of those applications is approved, then it appears that leaves us short of our goal by 399,921 prevented foreclosures.

Why isn't the program working?

Slade Smith's Blog ::

It's not that there's no interest on the part of homebuyers-- lenders report being "bombarded" with inquiries, their phones "going crazy".

And it seems like a good deal for the mortgage holder in most cases-- 90% of the appraised value of the home would usually be more than the proceeds from a foreclosure sale minus maintenance and selling expenses usually averaging around 15% of the sale price, right? Mortgage companies recognize this, and dozens of lenders have signed up to participate in the program.

The problem, for the most part, lies elsewhere. The New York Times has reported that some of the hedge funds that own mortgage-backed securities are threatening to sue mortgage companies if they agree to refinance loans under this program. The managers of these hedge funds say that they have a right to insist that the terms of any mortgages in which they have an interest are enforced. And since the interest in any one mortgage is usually divided amongst several bonds which may be held by several different institutions, any one of which might sue, mortgage servicers do not feel comfortable using the program.

In fact, this really should not be an issue-- Congress expressly addressed this exact scenario in the new law, legislating that so long as they are trying to maximize value, a mortgage servicer is fulfilling its fiduciary duty to investors by using the Hope for Homeowners program:

``SEC. 129A. <<NOTE: 15 USC 1639a.>> FIDUCIARY DUTY OF SERVICERS OF 
            POOLED RESIDENTIAL MORTGAGES.

    ``(a) In General.--Except as may be established in any investment 
contract between a servicer of pooled residential mortgages and an 
investor, a servicer of pooled residential mortgages--
            ``(1) owes any duty to maximize the net present value of the 
        pooled mortgages in an investment to all investors and parties 
        having a direct or indirect interest in such investment, not to 
        any individual party or group of parties; and
            ``(2) shall be deemed to act in the best interests of all 
        such investors and parties if the servicer agrees to or 
        implements a modification or workout plan, including any 
        modification or refinancing undertaken pursuant to the HOPE for 
        Homeowners Act of 2008, for a residential mortgage or a class of 
        residential mortgages that constitute a part or all of the 
        pooled mortgages in such investment, provided that any mortgage 
        so modified meets the following criteria:
                    ``(A) Default on the payment of such mortgage has 
                occurred or is reasonably foreseeable.
                    ``(B) The property securing such mortgage is 
                occupied by the mortgagor of such mortgage.
                    ``(C) The anticipated recovery on the principal 
                outstanding obligation of the mortgage under the
                modification or workout plan exceeds, on a net
                present value basis, the anticipated recovery on
                the principal outstanding obligation of the
                mortgage through foreclosure.

It appears to me that the hedge funds and other investors in mortgage-backed securities don't have much of a say in the matter of these Hope for Homeowners workouts. Yet we have government housing officials saying that "[t]here are situations where the servicers’ hands are tied because of the investors." I don't buy it. Either the mortgage companies need to grow a spine, stand up to the hedge funds, roll up their sleeves, and start helping out these homeowners who are seeking assistance under this law, or they need to explain why they are so afraid of investor lawsuits when it certainly appears that they are well-protected by the law.

Rating:

1172 words | 2463 views | 2 comments | log in or register to post a comment

	Did Congress even have the authority to enact such legislation?
	Had a State passed such a law it would quite arguably been unconstitutional under the Contracts Clause of the U.S. Constitution. (Art. 1, Section 10, Clause 1) No State shall... pass any... law impairing the obligation of contracts. The Supreme Court really eviscerated the Contracts Clause, however, in Home Building & Loan Association v. Blaisdell. The Court upheld a Minnesota law that prevented mortgage lenders from foreclosing during the Great Depression. The law was found to be a valid exercise of the State's Police Power and it was justified due to its temporary nature the exigencies of the circumstances. However, this was exactly the type of interference with Contract the framers sought to prevent with the Contracts Clause. Of course, the Contracts Clause is only applicable to the States - not the federal government. This was not because the federal government reserved this power unto itself, but because the federal government only has those powers enumerated in the Constitution and the Constitution arguably gives the federal government no such power... EXCEPT in bankruptcy! I hate to keep ringing this bell... but the appropriate place for this type of relief to homeowners is in the Bankruptcy Code. I think Dodd, and a few others, had the right idea when they wanted to incorporate similar relief within the bankruptcy provisions. It makes sense to do it there - those who are really in need of relief need to seek it in bankruptcy and the Bankruptcy Courts should have the authority to grant it. It made no sense to me that Congress was unwilling to explore these modifications to the Bankruptcy Code, yet they felt compelled to pass this Act that gives much the same relief to homeowners outside of bankruptcy. What was the logic? Perhaps that is why it is voluntary - for the lenders, anyway. The law does eliminate the substantive rights of the investors, which is likely to cause problems. Problems that could have been avoided if these issues were addressed in the proper forum of bankruptcy court. Excellent essay, Slade. Thank you for taking the time to write it.
	by Robert Franco \| 2008/10/31 \| log in or register to post a reply

	I think members of Congress probably consider it bad politics...
	...for their recovery plan for homeowners to be for them to go through a bankruptcy. This law was intended to provide relief. The American People would not see a plan that involved a bankruptcy as much relief-- bankruptcy has a stigma attached to it, not to mention the fact that a bankruptcy would have all kinds of other effects on a person's finances beyond their house. Then, you'd have no homeowner participation; they would all just give their keys back to the bank, which is what Congress was trying to prevent with this act. Your constitutionality concerns aside, I can understand why Congress would want to try a voluntary, temporary plan like this that does not tie up bankruptcy courts or tag affected homeowners with the scarlet 'B" of bankruptcy. Perhaps Congrress can pass a permanent bankruptcy cramdown law between now and when the Hope for Homeowners program sunsets in three years.
	by Slade Smith \| 2008/10/31 \| log in or register to post a reply

Slade Smith's Blog

I'm the web developer for Source of Title. Due to this role, I have become an interested observer of the title insurance industry and the broader issues arising out of real estate and finance. I have also blogged extensively about politics under the pseudonym "skymutt" at the partisan Democratic blog Daily Kos and the non-partisan community Swords Crossed.

Links