Sunday, September 28, 2008

Mortgage Modification by Federal Mandate is Coming

Image © WSJ, 2008.

The Emergency Economic Stabilization Act of 2008 (EESA)

The Associated Press (AP) reported today that the Plan issued on Sunday, September 28, 2008, included bailout language: "To help struggling homeowners, the plan requires the government to try renegotiating the bad mortgages it acquires with the aim of lowering borrowers' monthly payments so they can keep their homes." AP.

Section 109 of this Plan (which was Section 108 when the Plan was first written), sets out a huge Federal Renegotiation effort of all subprime mortgages, by the Federal Government, that become associated with this bailout effort.

While it is somewhat unclear how the Office of Financial Stability (OFS) will engage lenders to renegotiate prior to foreclosure - It is going to happen. Under the current structure in preforeclsoure loss mitigation, borrowers and lenders engage (if the borrowers choose to participate - many borrowers just run away and ignore the problem) in renegotiation credit review and "loss mitigation." If the borrower can come up with a payment plan that makes since for the lender (the incentive here is that the lender does not acquire and unsalable REO property) and the borrower can pay less onerous terms, the parties will enter into a loss mitigation contract. Notice that they do not change the terms of the underling mortgage. Instead they enter into a contact that sits on top of the mortgage. If the borrower breaches the contract - they lender reactivates the foreclosure.

Under new government sponsored "loss mitigation," it appears we will begin to see a complete "rewrite" of the terms of the underlying mortgages (deed to secure debt in Georgia). The terms of the Bailout rewrite package are contained in Section 109. It states as follows:


(a) Residential Mortgage Loan Serving Standards.

To the extent the Secretary acquires mortgages, mortgage-backed securities, and other assets secured by residential real estate, including multifamily housing, the Secretary shall maximize assistance for homeowners and use the Secretary's authority as investor to encourage the services of the underlying mortgages, consistent with a reasonable return to the taxpayer to take advantage of HOPE for homeowner program Section 257 of the National Housing Act or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.

(b) Coordination.

The Secretary shall coordinate with the Corporation (that is, the FDIC), the Board(with respect to any mortgages held by a federal reserve bank as provided in Section 110(a)(1)(c)), the Federal Housing Finance Agency, the Secretary of HUD and other federal government entities that hold troubled assets to attempt to identify opportunities for the acquisition of classes of troubled assets that will improve the Secretary's ability to improve the loan modification and restructuring process and, where permissible, to permit bona fide tenants who are current on their rent to remain in their homes under the terms of the lease. In the case of a mortgage on residential rental property, the plan shall include protecting Federal, State and local subsidies (and generate enough funds to ensure the maintenance of the property).

(c) Consent to Reasonable Loan Modification Requests.

Upon any request arising under exiting investment contracts, the Secretary shall consent, where appropriate, and considering net present value to the taxpayer, to reasonable request for loss mitigation measures, including terms extensions, rate reductions, principal write downs, increases in the portion of loans within a trust or other structure allowed to be modified, or removal of other limitations on modifications. Discussion Draft, 110th Congress, 2nd Session, September 28, 2008.

& & &

As presented today, the remaining major provisions of the 700B Bailout Plan appear to be:
* An oversight board will be created, which will include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director and the Housing and Urban Development secretary.
* The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury's use.
* Curbs will be placed on executive compensation plans for executives at companies that sell mortgage assets to Treasury. These include a $500,000 limitations on the tax deductibility of executive salaries for companies that participate in the plan.
* The Treasury is allowed in certain situations to exercise an option to take ownership stakes in participating companies.
* Treasury may establish an insurance program to guarantee certain assets for companies purchased prior to March 14, 2008. These assets include certain mortgage-backed securities.
* Another provision requires the president to propose legislation to recoup losses from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted.

Hugh Wood, Atlanta, Georgia


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