Consumer Law

The Foreclosure Agenda

By Alan White

By Alan White

The outgoing administration has failed utterly to get a handle on the foreclosure crisis.  Distress sales continue to rise every month, mortgage servicers continue to impose losses of 50% or more on investors (meaning, at this point, you and me) by foreclosing and property values continue to decline.  Right now, the Treasury is dithering about how restrictive and punitive to make the requirements for the FDIC's proposal to insure modified mortgages, insuring only that few homeowners will actually benefit, and few foreclosures will be prevented.

President-Elect Obama can and must end the drift in policy and set a clear agenda to end the foreclosure crisis.  He can do this with a set of policy initiatives, legislation, and by speaking to the American people. Here are a few proposals:

1.  A flexible moratorium on foreclosures - to give servicers and homeowners time to do what is not being done now, to prevent every preventable foreclosure.  Permission to foreclose should be granted on certification by a servicer that the home is not owner-occupied, the homeowner cannot afford any restructured loan meeting FDIC guidelines, or the homeowner has repeatedly defaulted on agreements meeting FDIC guidelines.  Some geographic flexibility for areas in which property values are not declining might also be appropriate, but the key step is to halt foreclosures and allow them only by exception.

2.  Mortgage modification templates:  Mortgage servicers need clear leadership from Treasury, the FDIC and the other bank regulators.  Many are willing to be more creative but reluctant to go out on a limb, especially to write down principal balances.  The new Treasury Secretary should cut through the current impasse and issue model mortgage modification agreements, available to all homeowners living in their homes whose current payments exceed 38% of current verifiable income.  To the extent current mortgage debt exceeds current property value, the mortgage principal should be reduced to 95% of current value, with the write-down replaced by a soft second lien, requiring no payments and progressively reducing to zero over five to ten years. The FDIC plan to insure modified mortgages should be put in place quickly.  Legislation providing safe harbors from investor suits for modifications meeting FDIC guidelines might also be useful.

3.  Incentives for servicers:  Treasury should pay incentive payments to mortgage servicers for successful mortgage modifications, with payments devised to defray some costs up front and to provide some extra compensation after 12 to 24 months of successful on-time payment by the homeowner.  Servicer charges for foreclosure-related activities should be scrutinized, regulated, and curtailed in every possible way to reduce economic incentives to foreclose.

4.   Keeping foreclosed homes occupied:  There is an equally urgent need to stop adding to the inventory of foreclosed homes in areas of declining home prices.  Servicers should be required to offer leases to owners or tenants in designated areas, and allowed to remain as renters until property values stabilize.  FHA already has such a program, called "occupied conveyance", but FHA foreclosures are quite low and not a major contributor to the existing crisis.  Our new President should announce the new foreclosure prevention plan and urge all homeowners who want to remain in their homes to do so, and not to walk away.

5.  Bankruptcy restructuring of bad mortgages:  the Durbin legislation or something like it should be adopted as early as possible, to permit bankruptcy courts to reduce principal and interest on underwater mortgages made before the crisis for homeowners willing to commit all their disposible income to debt repayment.  The voluntary plan needs an involuntary component to offer homeowners some negotiating leverage and a way to deal with recalcitrant or understaffed servicers.

6.  Reporting:  Treasury or the Fed should publish a monthly report detailing the number of foreclosure filings, sales, the REO inventory, mortgage modifications by type, and delinquency for modified and unmodified mortgages, by mortgage servicer and geographic area. Metrics should be developed to measure the performance of servicers in PREVENTING foreclosures, taking due account of the nature of the mortgages they are servicing.

7.  Making new mortgages sound and building wealth:  new loans for home buyers and homeowners refinancing their current debt must be based on sound underwriting.  FHA, Fannie and Freddie must provide leadership by developing safe and suitable mortgage products, and banishing no-doc and no-down-payment mortgages.  The default loan product should be a fully-amortizing loan, and interest-only and negative amortization loans should be strongly discouraged for low- and moderate-income homeowners.  Federal policy should encourage savings as well as borrowing, with a refundable savings credit, tax refund diversion, and similar initiatives, to insure that future homeowners can build equity.

8.  The new president should plan a major address devoted solely to housing issues facing America's owners and renters, assuring them that the tide of evictions and foreclosures will be stemmed, the Federal government will be rededicated to providing a safe and sanitary home for every family, but that the median income of $50,000 will no longer be buying a $600,000 house. 

Full post as published by CL&P Blog on November 06, 2008 (boomark / email).