A 5-year Freeze on Interest Rates
President Bush announced plans for a five-year freeze on interest rates for subprime mortgages to help responsible homeowners avoid foreclosure.

"We should not bail out lenders, real estate speculators or those who made the reckless decision to buy a home they knew they could never afford," Bush said. "But there are some responsible homeowners who could avoid foreclosure with some assistance." 

Bush said 1.2 million people could be eligible for help. But only a fraction will be subject to the rate freeze. Others, he said, would get assistance in refinancing with their lenders and moving into loans secured by the Federal Housing Administration. 

Dr. James Gaines, research economist with the Real Estate Center at Texas A&M University, calls the plan a noble effort to find a way to keep homeowners in their homes but says the basic premise is shaky, and the details are sketchy. 

“For the most part, the homeowners and borrowers likely to benefit from the interest rate freeze are the very same people who would have the best chance of renegotiating their loans with the lender in the first place — a borrower with a relatively sound credit rating and a history of making payments who simply needs a little help to keep from going into full default,” Gaines said.
 
Bush’s announcement followed news from the Mortgage Bankers Association that the percentage of mortgages that started the foreclosure process during the third quarter jumped to 0.78 percent, a record high. In addition, the delinquency rate for all mortgages climbed to 5.59 percent during the third quarter, the highest since 1986. 

Gaines said Texas borrowers — even subprime borrowers — are in better shape than those in the seven states dominating the delinquency and foreclosure statistics, because home prices here continue to rise, making selling or refinancing a viable alternative.

Click here to watch video on the Rate Cut and Housing Market Outlook by Goldman Sachs.

Washington, D.C., lawmakers have bills in play that could provide a carrot -- or a stick -- for lenders and loan servicers to participate in the Bush administration's rate-freeze plan.

Legislation that would allow bankruptcy judges to modify the terms of Chapter 13 debtors' mortgage loans could serve as a stick for lenders to conduct their own workouts, rather than have them imposed on them by a court.

The Center for Responsible Lending supports that approach, saying it has the potential to help more borrowers than the Bush administration's voluntary rate-freeze plan, announced Thursday (see Inman News story). But the mortgage lending industry argues that changing the bankruptcy code to allow judges to conduct "cram downs" would raise the cost of borrowing for all.

Another recently introduced bill would shield loan servicers who engage in workouts with borrowers from lawsuits by investors in securities backed by loans.

One motivation for the Bush administration's agreement with the "HOPE NOW" coalition of major lending industry companies was to address the reluctance of some loan servicers to modify loan terms to prevent foreclosures because of the fear of such lawsuits.

But federal regulators questioned whether one bill’s attempts to provide such protection are desirable or enforceable.

Both proposals were the subject of separate House and Senate committee hearings this week.

Bankruptcy "cram downs"

The Senate Judiciary Committee Wednesday debated legislation that would amend the bankruptcy code to allow judges to rewrite the terms of mortgage loans on owner-occupied homes.

Senate Bill 2136, introduced Oct. 3 by Sen. Richard Durbin, D-Ill., would amend federal bankruptcy law to allow judges to modify loans secured by a Chapter 13 debtor's principal residence, allowing them to make payments at a fixed annual percentage rate over a 30-year period. Durbin’s bill would also allow bankruptcy judges to "strip down" the amount of a mortgage to the value of the home without the consent of the mortgage holder.

A similar bill, HR 3609, was introduced in the House on Sept. 20 by Rep. Brad Miller, D-N.C., and is also opposed by the lending industry.

Sen. Arlen Specter, R-Penn., has introduced a competing bill to Durbin's, SB 2133, which would require the lender's consent to reduce the amount owed on a mortgage.

Bankruptcy courts already have the power to restructure troubled borrower's auto loans and credit card debt. But critics like the Mortgage Bankers Association say allowing bankruptcy judges to rewrite the terms of mortgage loans would undermine confidence in the ability of lenders to collect payments, and increase interest rates on mortgage loans by up to 2 percent.

Unlike a car loan -- in which the property serving as collateral for a loan decreases in value over time -- mortgages are backed by property that, in the long run, tends to appreciate. So lenders argue that a judge's decision to strip down a mortgage loan to reflect the current value of a bankrupt debtor's home would amount to a "taking" of their collateral.

Durbin's bill could also encourage more borrowers facing foreclosure to file for bankruptcy, critics said, increasing the case burden of bankruptcy judges and forcing them to deal with complex issues such as home valuations and mortgage interest rates.

But supporters of Durbin's bill said bankruptcy judges are already proficient at rewriting the terms of auto loans and credit card debt, and that stemming the tide of foreclosures is in the best interest of lenders and the economy.

Mark Zandi, chief economist of Moody's Economy.com, said he expects 2.8 million mortgage loan defaults in 2008 and 2009, with 1.9 million homeowners going through the entire foreclosure process and ultimately losing their homes.

Zandi said Durbin's bill could allow 570,000 homeowners to avoid foreclosure, a number based on an analysis of homeowners who face a first payment reset through the end of the decade and who meet the new, tougher requirements for Chapter 13 bankruptcy protection adopted by Congress in 2005.

"The housing market downturn is intensifying and mortgage foreclosures are surging," Zandi said, warning of a "self-reinforcing negative dynamic" of mortgage foreclosures, house price declines, and more foreclosures. "The odds of a full-blown recession are very high. There is no more efficacious way to short-circuit this developing cycle and forestall a recession than passing this legislation."

Zandi dismissed arguments that the bill would raise the cost of borrowing or disrupt the secondary market for mortgages, saying lenders stand to lose more if the loans that would become eligible for modification by bankruptcy judges were to foreclose instead.

"Given that the total cost of foreclosure to lenders is much greater than that associated with a Chapter 13 bankruptcy, there is no reason to believe that the cost of mortgage credit across all mortgage loan products should rise," Zandi said.

U.S. Bankruptcy Court Judge Jacqueline Cox, who adjudicates bankruptcy filings in Northern Illinois, said that the disparate impact of the mortgage crisis on African Americans and Latinos makes passage of the Durbin "critical." She said bankruptcy court judges would not be overwhelmed by the process of modifying home loans, which would include determining the current market value of each home.

Thomas Bennett, a federal bankruptcy court judge in Alabama, testified that the changes proposed by Durbin would not help borrowers who were not willing or able to file for bankruptcy, and could have broader, unintended consequences on credit markets.

Bennett urged lawmakers to step back for 60 to 90 days and "leave everything where it is" in order to get a broader picture. He said a temporary moratorium on foreclosures or an interest rate freeze could give them time to consider the bill's implications.

'Safe harbor' from lawsuits

At another hearing Thursday, the House Financial Services Committee debated a HR 4178, a bill introduced Nov. 14 by Rep. Mike Castle, R-Del., to protect loan servicers who engage in workouts under criteria established by the bill.

The bill would provide a "safe harbor" from lawsuits for loan servicers or other note holders who work with borrowers to restructure subprime loans in default, or loans where default is "imminent or reasonably foreseeable." The safe harbor would also apply when workouts would maximize "net present value" of a loan.

The bill would apply to subprime loans made after Jan. 1, 2004. The retroactive application of the bill "could create additional anxiety in the mortgage markets about the reliability of legal obligations upon which investors’ expectations are based," said Comptroller of the Currency John Dugan in his prepared testimony.

He questioned whether the bill would create new qualms for investors in mortgage-backed securities. "A loss – or even a significant diminution – of investor confidence in this market could adversely affect the flow of funds for housing credit for some time to come," Dugan said.

FDIC chairman Sheila Bair called the bill's goal of stimulating loan modifications by providing legal protection for loan servicers "laudable." But Bair said that as written, the bill could be challenged on Constitutional grounds, as it "would appear to override existing contracts."

Bair said that if Congress is determined to pass such a bill, it should contain language stipulating that "servicers have a duty to maximize the net present value of a loan pool for all investors and parties having an interest in the pool, not to any individual party or group of parties."

Foreclosure hotline overwhelmed with calls

National hotline to help borrowers receives record call-volume on Monday with 5,800 callers, compared to an average of 1,500 a day.

After President Bush's announcement of a plan to ease the foreclosure crisis Thursday, a national hotline to help borrowers facing foreclosure has been inundated with calls, an official of the group that operates the counseling hotline said Friday.

Borrowers facing foreclosure were told to call 888-995-HOPE, a line that has a normal call volume of about 1,500 calls a day, said Tracy Morgan, vice president of communications and business development for the Homeownership Preservation Foundation.

Figures are not yet compiled for Thursday's call volume, but Morgan estimated that it was three to five times the call-volume record set Monday, when 5,800 people called in after media outlets reported the likelihood of the president's announcement.

The Homeownership Preservation Foundation contracts with six credit counseling agencies nationwide to answer calls to the hotline.

One of those agencies, Consumer Credit Counseling Service of Greater Atlanta, received 920 calls between 1 and 5 p.m. Thursday, according to its director of public relations, Scott Scredon.

That's more than 11 times the average call volume of 75 to 80 calls, he said. "We're having to pull some people off of other jobs to take the calls, and some people are working overtime," he noted, but "typically, we've been able to handle the volume."

Scredon said callers are waiting longer on hold to talk with counselors, but all calls are being handled. He had no estimate of the average wait time.

Novadebt, a New Jersey counseling organization that also handles hotline calls, received more than 1,600 calls Thursday, according to Diane Gray, director of counseling and education.

According to Morgan, calls to the hotline have steadily increased throughout the year as the foreclosure crisis has grown and the hotline has gotten more publicity. Calls increased 100 percent from the first quarter of the year to the second quarter, and 94 percent from the second to the third, she said.

The Homeownership Preservation Foundation has increased the number of counselors available to staff the hotline, and it plans to add another 70 by the end of the year to bring the total to 250, she said.

The not-for-profit foundation is funded through the U.S. Department of Housing and Urban Development, partnerships with mortgage lenders and servicers, and charitable contributions.

Subprime hotline has 45,000 calls in three days
as of Tuesday December 11

A hotline for a program that aims to help about 1.2 million subprime borrowers received 45,000 calls in the three days after President George W. Bush announced the program, the HOPE NOW alliance said on Tuesday.

Call volume spiked after Bush and Treasury Secretary Henry Paulson cited the counseling center on Thursday in detailing a program to help curb foreclosures.

The Bush plan, supported by major lenders, would freeze interest rates on certain subprime loans before scheduled jumps in monthly payments. Critics claim the requirements lock out hundreds of thousands of borrowers facing the loss of their homes and will have only marginal impact on foreclosures that last quarter reached record levels.

Borrowers calling 1-888-995-HOPE will receive foreclosure prevention counseling, but they must call lenders to see if they qualify for the loan modification program, Faith Schwartz, executive director of HOPE NOW, said in a statement issued by the consortium of lenders, industry groups and counselors.

SENATE APPROVES BILL TO ELIMINATE TAXES ON FORGIVEN MORTGAGE DEBT

In a move to address the subprime lending crisis and to help struggling home loan borrowers, the Senate on Dec. 14 approved legislation that would eliminate any taxes home owners might face when banks renegotiate the terms of a home loan and forgive a portion of the outstanding mortgage debt. The change in the tax law would cap untaxable forgiven mortgage debt at $2 million and apply only to principal residences.

"This legislation will play a central role in helping American families avoid foreclosure and stay in their homes," said Brian Catalde, president of the National Association of Home Builders (NAHB) and a home builder from El Segundo, Calif.

Existing tax rules under Section 108 of the Internal Revenue Code impel many struggling home owners to seek foreclosure over restructuring their loan with lenders because forgiven mortgage debt is taxed as ordinary income.

S. 1394, the Mortgage Cancellation Relief Act of 2007, would remove this tax burden on mortgage indebtedness, encourage market-based restructuring between lenders and home owners and discourage foreclosures, said Catalde.

Sponsored by Sens. Debbie Stabenow (D-Mich.) and George Voinovich (R-Ohio), the bill would provide a temporary, three-year change to the tax code to eliminate taxes on forgiven mortgage debt.

For example, to keep a struggling borrower with a generally solid credit history from losing their home, a bank could elect to reduce the amount of the loan by 20 percent - from $250,000 to $200,000. While substantial, the $50,000 reduction would still be considerably less than the 30-to-50 percent loss that would be likely if the home were repossessed. The outcome, obviously, would be better for the home owner, who otherwise would lose the property.

Under current tax law, the $50,000 in forgiven mortgage debt is considered taxable income. That's a deal-killer for the home owner who is already fighting just to stay afloat.
"That's why we need to change the law," said Catalde.

S. 1394 also includes an NAHB-supported provision that extends the deductibility of mortgage insurance for three more years. Mortgage insurance is especially critical for low- and moderate-income first-time home buyers, many of whom may not qualify for a market-rate mortgage.

Catalde also urged the Senate to continue to address the housing crisis by quickly reconciling its FHA reform legislation, S. 2338, which passed last week, with its House-passed counterpart, H.R. 1852, and passing legislation to reform Fannie Mae and Freddie Mac and allow them to purchase mortgages in high-cost markets.

"These three pieces of legislation are critical to help the housing and credit markets to stabilize and recover," said Catalde. "We are hopeful that the House will take up and pass the Senate debt forgiveness bill and send it to the President this week before the Congress adjourns for the holidays."

How Foreclosures Work

If you suddenly find that you can't afford to pay your monthly loan payment, your lender has the legal right to repossess your home and resell it to recoup the cost of the loan. Foreclosure is a legal course of action in which nobody really comes out on top. It's a stressful and unfortunate situation for the homeowner and lender alike. Many people remain in denial about their finances, making the situation worse. As unfortunate as the foreclosure process may be, there are things you can do to save your home if you're faced with it.

See http://money.howstuffworks.com/foreclosure.htm

U.S. Government Finally Getting Serious About Mortgage Reforms

Tyler Cowen thinks that the Fed should not have a consumer-protection function. I'm largely sympathetic – it's not as though there's any shortage of other regulators in Washington who could pick up the slack – but in reality the Fed does more for consumers than Cowen gives it credit for. Look at this Ned Gramlich speech, for instance: the Fed was always at the forefront of efforts to ensure that (a) banks lent to blacks as well as whites, and that (b) banks lent to blacks at the same risk-adjusted interest rates at which they lent to whites. In this era of abundant credit, people sometimes forget about the redlining problem, but it was a big one, and we can thank the Fed, in part, for helping to solve it.

All that said, Edmund Andrews's front-page NYT article yesterday, "Fed Shrugged as Subprime Crisis Spread," does compellingly describe a central bank which at best was committed to laissez-faire policies, or which at worst was trying to shore up the post-dot-com-crash economy by deliberately allowing the property bubble to inflate.

So I'm glad that the Fed has finally gotten around to responding, with policies designed, in the words of the AP's Jeannine Aversa, to "give people taking out home mortgages new protections against shady lending practices".

Most prepayment penalties would be banned on subprime loans: I like that. Underwriting standards would be tightened up on no-doc loans: I don't quite see the point of that one, but it certainly can't do much harm. And lenders would have to include tax and insurance payments along with mortgage repayments when making their underwriting decisions: well, duh. (Update: Tanta reckons this is an escrow thing, not an underwriting thing. Which, as she rightly points out, could be more problematic.)

The big change is that lenders would have to underwrite subprime loans based on the borrower's ability to repay over the duration of the mortgage, rather than just for the initial teaser period. This could well affect younger borrowers with a very good chance of seeing their income rise significantly by the time the reset comes, although without seeing the details of the proposal it's hard to know for sure. It will certainly serve to dampen the amount of property speculation going on among subprime borrowers, which must be a good thing.

Meanwhile, it's also worth noting that Hank Paulson has come out in favor of Fannie (FNM) and Freddie (FRE) being able to buy jumbo mortgages. It seems that the Federal government is – finally – getting serious about addressing problems in the mortgage industry. It's too late, of course. But better late than never, I suppose.

House Passes 3 Key Housing-Related Bills

The U.S. House on Tuesday passed three bills that will have a big impact on the real estate industry. All three have passed the Senate and President George W. Bush is expected to sign them.

The bills are:

The Mortgage Forgiveness Debt Relief Act of 2007. This legislation waives taxes by creating a three-year exception for borrowers whose mortgages are modified, with a portion of their debt forgiven, to avoid foreclosure or other financial distress.

"In sending this bill to the president, Congress made a good decision today that will affect many Americans who find themselves in a truly bad situation,” NAR President Richard (Dick) Gaylord said in an NAR public statement on the issue. “As the leading advocate for housing issues, NAR believes that changing the IRS code is an issue of fundamental fairness. It will relieve a tax burden at a time when an individual or family has experienced a true economic loss arising from the sale or loss of their home."

Mortgage Insurance Tax Deductibility. This bill makes mortgage insurance premiums tax deductible for all mortgages originated for the next three years. Mortgage insurer Genworth Financial estimates that this tax break is worth $350 to the average taxpayer who has purchased a home with less than 20 percent down.
Terrorism Risk Insurance Act. Federal backstops for terrorism insurance, passed initially after the Sept. 11 attacks, have been extended for another seven years. The bill also expands the program's protection by including domestic terrorism. The insurance and real estate industries have pushed for an extension, saying federal guarantees to help cover catastrophic losses are crucial to stimulating the investment needed to spur economic growth.

Homeowners struggling with rising mortgage payments say promises of help from lenders are turning up empty.

Some homeowners who are still paying their adjustable-rate mortgages on time -- but are struggling to do so and are worried about keeping up when the payments adjust even higher -- are finding that their mortgage company won't help them until they actually fall behind.

In short, the time-honored advice to take action before you get in trouble, and contact your lender to work out a solution, doesn't appear to hold true in these days of soaring foreclosures and tighter credit. Lenders aren't required to bail out homeowners when their mortgage rates and payments adjust upward, even though they've been under enormous pressure from lawmakers and consumer groups to do so.

In December, President Bush called on lenders to relax their rules and negotiate lower interest rates to help homeowners avoid foreclosures. Critics said Bush's plan was both limited in scope and voluntary, and said many homeowners stuck in a bad situation wouldn't get the help they needed. It appears the critics were right.

"We're seeing a lot of homeowners who are doing exactly what the banks are asking them to do and being told there's no help for them," said Pava Leyrer, a mortgage broker.

"They're being told that because they haven't missed a payment yet, the bank can't do anything."

The predicament has consumers in a Catch-22: They're being told that even with spotless credit, they can't get help. Instead, they must miss payments, and even then assistance from the lender isn't a certainty.

Lenders maintain they're doing what they can for struggling homeowners -- such as delaying an interest rate adjustment or lowering the interest rate cap on a homeowner's ARM. They also look at each person's situation to determine if they can refinance an ARM to a fixed-rate loan.

But they admit that today's tight credit market is making it more difficult to help.

Because of the credit crunch and tougher mortgage rules, lenders are finding it increasingly difficult to help homeowners, especially those who are upside down on their homes, which means they owe more on their loans than their home is worth.

Fed Rate Cut Spurs Mortgage Applications

Mortgage applications rose another 7.5 percent last week on a seasonally adjusted basis, compared to the previous week, according to the Mortgage Bankers Association’s weekly mortgage applications survey.

On an unadjusted basis, the index increased 10.5 percent compared with the previous week and was up 70.7 percent compared with the same week a year ago.

The increase reflected a rush to refinance even though rates were up slightly from the previous week when the Federal Reserve responded to recession fears by cutting key rates by three-quarters of a percent. The refinance share of last week’s mortgage activity was 73 percent, up from 60 percent the previous week.

Mortgage rates rose:

* 30-year fixed-rate mortgages increased to 5.6 percent from 5.49 percent.
* 15-year fixed-rate mortgages increased to 5.04 percent from 4.96 percent.
* 1-year ARMs increased to 5.7 percent from 5.51 percent.

Tighter Lending Standards "Hurt" Those Needing Help, for all the talk we do about refinancing loans and helping troubled borrowers and saving the housing market with lower interest rates, the bottom line is that tighter credit is the culprit.

Banks simply aren’t willing to lend to the even slightly less than credit-worthy customers. I hear it from industry insiders and outsiders for that matter. It’s one thing to offer all these bailout plans, to beg people to call their lenders to refi, to lower interest rates in order to lure buyers off the fence. But the bulk of those people everyone’s trying to lure and help and bail out are inevitably being turned away by the very banks and lenders that created this problem in the first place.

Congress is looking at more incentives as ways to address problems in the housing market.

Top Democrats, who successfully backed the just-passed economic-stimulus bill, say they will push through a second measure that will allow bankruptcy judges to alter the terms of certain mortgages.

Another measure under consideration is a tax break allowing companies with operating losses this year or the two previous years to apply them to past years for a refund. This idea is popular with home builders.

A third proposal would allot an additional $10 billion in bonding authority so housing-finance agencies can give more help to people refinancing subprime loans or first-time buyers. President Bush recently backed this idea.

Lawmakers also are considering $4 billion in block grants so localities with high foreclosure rates can buy and rehabilitate unoccupied property and $200 million for pre-foreclosure housing counselors.

HOPE NOW releases list of all alliance members' toll-free numbers

HOPE NOW has released a list of the toll-free service numbers for every alliance member as part of its unprecedented effort to encourage distressed homeowners to get in touch with their servicers. This phone list represents over 90 percent of the servicers of the subprime market and over 80 percent of the prime market.

"It is a top priority for all those involved in HOPE NOW to get in contact with the at-risk borrowers," said Faith Schwartz, executive director for HOPE NOW. "We strongly encourage any homeowner in distress to call their mortgage company or the Homeowner's HOPE Hotline 888-995-HOPE, to discuss options."