$300 billion FHA rescue saving literally DOZENS from foreclosure
--promoted by pico
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?
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.