Sunday, October 5, 2008

FHFA Will Modify Mortgage Terms by Brute Force

Major mortgage modification is coming, but from a different corner of the financial and legal playing field. If and when the newly created Federal Housing Finance Agency (“FHFA”) issues its mortgage modification regulations, borrowers will be able to demand that the mortgage and collection efforts of originators and servicers be conformed to the new FHFA guidelines.

To the best of this authors’ knowledge, those guidelines have yet to hit the Code of Federal Regulations.

Mortgage modification has been done by private lenders, Wells Fargo, WAMU, etc., for a number of years – some voluntarily and some – by outside federal and political pressure.

The mortgage industry was able to kill the provision that would have allowed federal bankruptcy judges to modify mortgages in bankruptcy in the enactment of the Emergency Economic Stabilization Act of 2008 (“EESA”). [That was really quite a feat of political acumen.]

These laws are so new, there simply is not enough well developed commentary or real world use to know how they will be used to modify mortgages. However, a pattern is emerging.

The longarm of the federal government is simply going to reach and modify mortgage by brute force. The government is going to do it via the back door of its now complete control of Fannie Mae and Freddie Mac.

Instead of passing laws (probably impairment of contact) requiring the originator to change the terms of the mortgage or allowing a federal bankruptcy judge to modify it posthoc, the feds are going to do it (we think) via its control of Frannie Mae and Feddie Mac.

All loans that qualified for Fannie Mae, were sold immediately after origination at the loan closing. Everyone agrees to abide by the regulations that oversee Fannie Mae and Freddie Mac.

It is hard to imagine a scenario, other than the 1929 to 1939 Great Depression, where both Fannie Mae and Freddie Mac end up in control of a Federal Conservator, yet it does now exist.

The FHFA is now the federal Conservator of Fannie Mae and Freddie Mac.

Under the recently passed EESA, the FHFA has been given broad new powers.

The FHFA was given the express authority, for the loans that it is the legal owner by way of the Conservatorship, to:

1) reduce the interest rate;
2) reduce the loan principal, and
3) craft other modifications.

FHFA was also given express authority to lean on (“lean on,” seems to be an appropriate legal term here) the servicer to modify the loans, if the FHFA does not own the legal right under its Conservatorship. Sec., 110, EESA of 2008.

As an industry, the loan originators and servicers have not yet had an opportunity to prepare regulations governing the enactment of HOPE (HOPE for Homeowners Act of 2008) in the Summer of 2008.

HOPE mandates that modifications shall:
1) achieve a ratio of no more than 31% of income to mortgage payment (anecdotal evidence indicates many subprime borrowers are paying in excess of 50% of net income to stay in their principal residence);
2) Mortgages shall be not less than 30 year fixed and Adjustable rates are eliminated by regulation (not law);
3) Second Mortgages are fundamentally (read the legislation for the exceptions) eliminated on modified mortgages;
4) Modifications are for primarily residences only (investor mortgages apparently will still go the way of foreclosure and elimination).

How the HOPE regulations with dovetail into or with FHFA Regulations is anybody's guess.

The method by which borrowers may assert their rights to modification will be determined, if and when FHFA issues Regulations. Once the Regulations are made public, then the borrowers may begin to “demand,” that the originators and/or servicers bring their mortgage default demands in line with new FHFA guidelines.

Hugh Wood, Atlanta, Georgia

& & &

The relevant portions of the EESA of 2008 and the HOPE of 2008 are reproduced below.

(a) Definitions- As used in this section--
(1) the term 'Federal property manager' means--
(A) the Federal Housing Finance Agency, in its capacity as conservator of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation;
(B) the Corporation, with respect to residential mortgage loans and mortgage-backed securities held by any bridge depository institution pursuant to section 11(n) of the Federal Deposit Insurance Act; and
(C) the Board, with respect to any mortgage or mortgage-backed securities or pool of securities held, owned, or controlled by or on behalf of a Federal reserve bank, other than mortgages or securities held, owned, or controlled in connection with open market operations under section 14 of the Federal Reserve Act (12 U.S.C. 353), or as collateral for an advance or discount that is not in default;
(2) the term 'consumer' has the same meaning as in section 103 of the Truth in Lending Act (15 U.S.C. 1602);
(3) the term 'insured depository institution' has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813); and
(4) the term 'servicer' has the same meaning as in section 6(i)(2) of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2605(i)(2)).
(b) Homeowner Assistance by Agencies-
(1) IN GENERAL- To the extent that the Federal property manager holds, owns, or controls mortgages, mortgage backed securities, and other assets secured by residential real estate, including multifamily housing, the Federal property manager shall implement a plan that seeks to maximize assistance for homeowners and use its authority to encourage the servicers of the underlying mortgages, and considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures.
(2) MODIFICATIONS- In the case of a residential mortgage loan, modifications made under paragraph (1) may include--
(A) reduction in interest rates;
(B) reduction of loan principal; and
(C) other similar modifications.
(3) TENANT PROTECTIONS- In the case of mortgages on residential rental properties, modifications made under paragraph (1) shall ensure--
(A) the continuation of any existing Federal, State, and local rental subsidies and protections; and
(B) that modifications take into account the need for operating funds to maintain decent and safe conditions at the property.
(4) TIMING- Each Federal property manager shall develop and begin implementation of the plan required by this subsection not later than 60 days after the date of enactment of this Act.
(5) REPORTS TO CONGRESS- Each Federal property manager shall, 60 days after the date of enactment of this Act and every 30 days thereafter, report to Congress specific information on the number and types of loan modifications made and the number of actual foreclosures occurring during the reporting period in accordance with this section.
(6) CONSULTATION- In developing the plan required by this subsection, the Federal property managers shall consult with one another and, to the extent possible, utilize consistent approaches to implement the requirements of this subsection.
(c) Actions With Respect to Servicers- In any case in which a Federal property manager is not the owner of a residential mortgage loan, but holds an interest in obligations or pools of obligations secured by residential mortgage loans, the Federal property manager shall--
(1) encourage implementation by the loan servicers of loan modifications developed under subsection (b); and
(2) assist in facilitating any such modifications, to the extent possible.
(d) Limitation- The requirements of this section shall not supersede any other duty or requirement imposed on the Federal property managers under otherwise applicable law.

& & &

U.S. Housing and Foreclosure Prevention Act of 2008 (July 30, 2008)
H.R. 3221
SEC. 1401. HOPE for Homeowners Act of 2008

(a) Establishment- Title II of the National Housing Act (12 U.S.C. 1707 et seq.) is amended by adding at the end the following:


(a) Establishment- There is established in the Federal Housing Administration a HOPE for Homeowners Program.
(b) Purpose- The purpose of the HOPE for Homeowners Program is--

(1) to create an FHA program, participation in which is voluntary on the part of homeowners and existing loan holders to insure refinanced loans for distressed borrowers to support long-term, sustainable homeownership;
(2) to allow homeowners to avoid foreclosure by reducing the principle balance outstanding, and interest rate charged, on their mortgages;
(3) to help stabilize and provide confidence in mortgage markets by bringing transparency to the value of assets based on mortgage assets;
(4) to target mortgage assistance under this section to homeowners for their principal residence;
(5) to enhance the administrative capacity of the FHA to carry out its expanded role under the HOPE for Homeowners Program;
(6) to ensure the HOPE for Homeowners Program remains in effect only for as long as is necessary to provide stability to the housing market; and
(7) to provide servicers of delinquent mortgages with additional methods and approaches to avoid foreclosure.

(c) Establishment and Implementation of Program Requirements-
(1) DUTIES OF THE BOARD- In order to carry out the purposes of the HOPE for Homeowners Program, the Board shall--'(A) establish requirements and standards for the program; and'(B) prescribe such regulations and provide such guidance as may be necessary or appropriate to implement such requirements and standards.
(2) DUTIES OF THE SECRETARY- In carrying out any of the program requirements or standards established under paragraph (1), the Secretary may issue such interim guidance and mortgagee letters as the Secretary determines necessary or appropriate.

(d) Insurance of Mortgages- The Secretary is authorized upon application of a mortgagee to make commitments to insure or to insure any eligible mortgage that has been refinanced in a manner meeting the requirements under subsection (e).

(e) Requirements of Insured Mortgages- To be eligible for insurance under this section, a refinanced eligible mortgage shall comply with all of the following requirements:

(i) IN GENERAL- The mortgagor shall provide certification to the Secretary that the mortgagor has not intentionally defaulted on the mortgage or any other debt, and has not knowingly, or willfully and with actual knowledge, furnished material information known to be false for the purpose of obtaining any eligible mortgage.
(I) FALSE STATEMENT- Any certification filed pursuant to clause (i) shall contain an acknowledgment that any willful false statement made in such certification is punishable under section 1001, of title 18, United States Code, by fine or imprisonment of not more than 5 years, or both.
(II) LIABILITY FOR REPAYMENT- The mortgagor shall agree in writing that the mortgagor shall be liable to repay to the Federal Housing Administration any direct financial benefit achieved from the reduction of indebtedness on the existing mortgage or mortgages on the residence refinanced under this section derived from misrepresentations made in the certifications and documentation required under this subparagraph, subject to the discretion of the Secretary.'

(B) CURRENT BORROWER DEBT-TO-INCOME RATIO- As of March 1, 2008, the mortgagor shall have had a ratio of mortgage debt to income, taking into consideration all existing mortgages of that mortgagor at such time, greater than 31 percent (or such higher amount as the Board determines appropriate).

(2) DETERMINATION OF PRINCIPAL OBLIGATION AMOUNT- The principal obligation amount of the refinanced eligible mortgage to be insured shall--
(A) be determined by the reasonable ability of the mortgagor to make his or her mortgage payments, as such ability is determined by the Secretary pursuant to section 203(b)(4) or by any other underwriting standards established by the Board; and'(B) not exceed 90 percent of the appraised value of the property to which such mortgage relates.

(3) REQUIRED WAIVER OF PREPAYMENT PENALTIES AND FEES- All penalties for prepayment or refinancing of the eligible mortgage, and all fees and penalties related to default or delinquency on the eligible mortgage, shall be waived or forgiven.

(A) REQUIRED AGREEMENT- All holders of outstanding mortgage liens on the property to which the eligible mortgage relates shall agree to accept the proceeds of the insured loan as payment in full of all indebtedness under the eligible mortgage, and all encumbrances related to such eligible mortgage shall be removed. The Secretary may take such actions, subject to standards established by the Board under subparagraph (B), as may be necessary and appropriate to facilitate coordination and agreement between the holders of the existing senior mortgage and any existing subordinate mortgages, taking into consideration the subordinate lien status of such subordinate mortgages.

(i) IN GENERAL- The Board shall establish standards and policies that will allow for the payment to the holder of any existing subordinate mortgage of a portion of any future appreciation in the property secured by such eligible mortgage that is owed to the Secretary pursuant to subsection (k).'(ii) FACTORS- In establishing the standards and policies required under clause (i), the Board shall take into consideration--'(I) the status of any subordinate mortgage;'(II) the outstanding principal balance of and accrued interest on the existing senior mortgage and any outstanding subordinate mortgages;'(III) the extent to which the current appraised value of the property securing a subordinate mortgage is less than the outstanding principal balance and accrued interest on any other liens that are senior to such subordinate mortgage; and'(IV) such other factors as the Board determines to be appropriate.

(C) VOLUNTARY PROGRAM- This paragraph may not be construed to require any holder of any existing mortgage to participate in the program under this section generally, or with respect to any particular loan.

(5) TERM OF MORTGAGE- The refinanced eligible mortgage to be insured shall--'(A) bear interest at a single rate that is fixed for the entire term of the mortgage; and'(B) have a maturity of not less than 30 years from the date of the beginning of amortization of such refinanced eligible mortgage.

(6) MAXIMUM LOAN AMOUNT- The principal obligation amount of the eligible mortgage to be insured shall not exceed 132 percent of the dollar amount limitation in effect for 2007 under section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454(a)(2)) for a property of the applicable size.

(7) PROHIBITION ON SECOND LIENS- A mortgagor may not grant a new second lien on the mortgaged property during the first 5 years of the term of the mortgage insured under this section, except as the Board determines to be necessary to ensure the maintenance of property standards; and provided that such new outstanding liens (A) do not reduce the value of the Government's equity in the borrower's home; and (B) when combined with the mortgagor's existing mortgage indebtedness, do not exceed 95 percent of the home's appraised value at the time of the new second lien.

(8) APPRAISALS- Any appraisal conducted in connection with a mortgage insured under this section shall--'(A) be based on the current value of the property;'(B) be conducted in accordance with title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 3331 et seq.);'(C) be completed by an appraiser who meets the competency requirements of the Uniform Standards of Professional Appraisal Practice;'(D) be wholly consistent with the appraisal standards, practices, and procedures under section 202(e) of this Act that apply to all loans insured under this Act; and'(E) comply with the requirements of subsection (g) of this section (relating to appraisal independence).

(9) DOCUMENTATION AND VERIFICATION OF INCOME- In complying with the FHA underwriting requirements under the HOPE for Homeowners Program under this section, the mortgagee shall document and verify the income of the mortgagor or non-filing status by procuring (A) an income tax return transcript of the income tax returns of the mortgagor, or(B) a copy of the income tax returns from the Internal Revenue Service, for the two most recent years for which the filing deadline for such years has passed and by any other method, in accordance with procedures and standards that the Board shall establish.

(10) MORTGAGE FRAUD- The mortgagor shall not have been convicted under Federal or State law for fraud during the 10-year period ending upon the insurance of the mortgage under this section.

(11) PRIMARY RESIDENCE- The mortgagor shall provide documentation satisfactory in the determination of the Secretary to prove that the residence covered by the mortgage to be insured under this section is occupied by the mortgagor as the primary residence of the mortgagor, and that such residence is the only residence in which the mortgagor has any present ownership interest.

[ remainder of statute redacted ]



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