The Foreclosure Fight Gets Streamlined
Wednesday, November 12, 2008
As losses from bad loans continue to mount despite more than a year of government and industry focus, some of the giants of the mortgage industry, including Fannie Mae and Freddie Mac, yesterday unveiled another stepped-up effort to keep delinquent borrowers out of foreclosure.
Government and lender efforts to stem foreclosures have been stymied by the sheer size of the problem. This program attempts to address that by using a simplified process for determining whether someone is eligible for a new loan. Instead of the standard cumbersome loan modification process, which can include reviewing a borrower's credit report and tax returns, the new plan focuses on the borrower's income and how much he or she can afford to pay. It also creates a formula for determining what a homeowner can afford, eliminating some guesswork.
Government officials said they expect the effort, dubbed the Streamlined Modification Program, to be able to help "hundreds of thousands" of homeowners.
But the new program is also an acknowledgment that the industry's efforts to keep people in their homes have not kept up with growing foreclosure rates.
"We are experiencing a necessary housing correction, and the sooner we work through it, the sooner housing can again contribute to our economic growth," Neel Kashkari, the interim assistant Treasury secretary for financial stability, said at a news conference.
The program, set to begin Dec. 15, applies only to mortgages owned or guaranteed by Fannie Mae and Freddie Mac, which are involved with more than 50 percent of residential loans. But major lenders, including Bank of America, Wells Fargo and Citigroup, have agreed to apply the formula to loans they administer for Fannie Mae and Freddie Mac and are expected to extend it to their own loans, industry officials said.
"This is a big step forward that will make it easier to modify loans for the most at-risk homeowners so they will be able to avoid foreclosure and stay in their homes," said Faith Schwartz, head of Hope Now, an alliance of lenders that has spearheaded the industry's foreclosure response and will be advocating the new standards.
A borrower who is 90 days delinquent will be eligible for a new loan with a payment that does not exceed 38 percent of his gross monthly income.
To qualify, the homeowner must provide proof that he has suffered a hardship, such as losing a job, that made it impossible to keep up with payments. The terms of the borrower's loan then could be extended from 30 years to 40 years, and if that is not enough, the interest rate could be reduced to as low as 3 percent to make the payments more affordable. The homeowner could be subject to an interest rate increase after a set time, depending on how low their new interest rate is. If those options don't reduce payments enough, part of the principal owed on the loan could be deferred until the end of the loan term.
The new program also retains many of the practices that have frustrated other efforts to modify troubled loans. For example, it excludes borrowers who are current on their mortgages but face an interest rate increase that will make payments unaffordable. It also does not provide any new mechanism for reaching homeowners, who in about half of foreclosures have not talked to their lenders.
By requiring the homeowner to be 90 days delinquent, the program fails to anticipate problems, said John Taylor, president and chief executive of the National Community Reinvestment Coalition, an activist group. "Why not 60 days? Why not 30 days? In fact, why not say that based on their income and this type of loan, we know this family is going to be underwater in six months or sooner" and act before they fall behind, he said. "We really need a plan that thinks in proactive ways, that gets ahead of the problem."
The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, is also still trying to persuade investor groups to adopt the program. Those investors own millions of loans that have been pooled together. The American Securitization Forum, an industry association for financial firms and investor groups, said it welcomed the program but did not say whether its members would sign on. "ASF is considering the loan modification approaches embodied in this plan, along with other recently announced plans," the group said in a statement.
Government and industry officials drew parallels between the new program and a loan modification program launched by the Federal Deposit Insurance Corp. at the failed bank IndyMac. Like the IndyMac program, the primary focus of the new program is the affordability of the loan.
But FDIC Chairman Sheila C. Bair, who has championed aggressive loan modification, said the latest proposal fell short of what was needed. "We are pleased that the protocols announced today draw from the loan modification metrics we have instituted at IndyMac. However, there are questions that remain about implementation," she said in a statement yesterday.
This comes at a time when lenders are under increasing pressure to do more to head off rising foreclosure rates. The House Financial Services Committee is scheduled to hold a hearing today on private-sector mortgage efforts.
Meanwhile, the housing market continues to struggle. One of the country's largest builders, Toll Brothers, said yesterday that problems have worsened since the onset of the financial crisis this fall. The housing market showed preliminary signs of stability, but that has been upended by the financial crisis, Robert I. Toll, chairman and chief executive, said in a statement. The company's revenue fell 41 percent in the most recent quarter as home buyers canceled orders.
"Results of this crisis -- accelerating fears of job losses, a large decline in consumer spending, a significant capital crunch, increased credit market disruption and plummeting stock market values -- all contributed to drive our cancellations," he said.