Mortgage Rescue Eligibility Still Being Finalized
Friday, February 20, 2009
A day after President Obama unveiled his $75 billion foreclosure prevention program, administration officials yesterday said they were still determining which homeowners should qualify.
The administration is developing a standard for lenders to use in evaluating applicants that seeks to exclude homeowners who are not in real need or are too far behind in their payments to be saved. Officials have set some conditions for eligibility, including requiring that borrowers' mortgage payments consume more than 38 percent of their income and that the property be a primary residence.
Government officials are working to finalize details before a self-imposed March 4 deadline when the program will go into effect and lenders are likely to be flooded with calls.
The program is aimed at stemming the tide of foreclosures as predictions mount that another wave of risky loans could begin defaulting later this year as a deepening recession makes it more difficult for borrowers to afford their homes.
The administration's effort includes several elements, including a refinancing initiative for borrowers with little equity in their home. A separate loan modification program gives lenders incentive payments to keep borrowers in their homes rather than foreclose on the properties.
A chief goal of the loan modification program is to address complaints of consumer advocates that borrowers are often turned away by lenders when they seek help before becoming delinquent on loans. The plan includes extra incentive payments for lenders that reach "at-risk" homeowners and modify their loans before they become delinquent.
"But what counts as an at-risk homeowner?," said Edward R. Morrison, a professor at Columbia Law School. He said policymakers should avoid setting a standard that encourages lenders and mortgage servicers to rework sustainable loans just to get payments from the government.
Administration officials involved in developing the program said they are basing their effort on a model developed by the Federal Deposit Insurance Corp. The formula to determine at-risk borrowers likely will weigh a homeowner's debt level and payment track record, officials said. But in setting eligibility standards, they are also trying to determine what documentation borrowers should provide to prove they could lose their job or face a reduction in income, they said.
Another key question facing the administration is how to calculate when foreclosure would be a better deal for lenders than keeping borrowers in their home, even with incentives. The administration will attempt to generalize the FDIC formula, known as the net present value test, and apply it to the entire mortgage industry, according to officials familiar with the effort.
"If a borrower has no means of repayment, even if you restructure the loan, then foreclosure may be the only option," said Diane Casey-Landry, chief operating officer of the American Bankers Association. "We're very interested in how they're going to develop it." The administration is canvassing the financial services industry and consumer advocates for input on this and other issues. "They want them as soon as possible, so we're scrambling," said Paul M. Leonard, vice president of government affairs at the Financial Services Roundtable's housing policy council.
Obama has pledged to spend $75 billion on loan modifications. About $50 billion would come from federal bailout funds approved by Congress to shore up the financial system, with mortgage financing firms Fannie Mae and Freddie Mac and the Department of Housing and Urban Development also contributing, administration officials said. The HUD money will be used to help fund nonprofit housing groups, the officials said. The money from the Fannie Mae and Freddie Mac will be used pay incentive fees and rate subsidies to mortgage servicers that modify mortgages that the financing agencies own or guarantee.
Even as the administration finalizes details of the mortgage modification program, officials are getting pressure from some groups to include protection for lenders and mortgage servicers that rework a loan and worry they could face a lawsuit from investors.
The Mortgage Bankers Association is also trying to persuade the administration to expand the refinancing portion of the plan. Under that program, the administration will loosen lending standards at Fannie Mae and Freddie Mac to allow millions of homeowners to qualify for refinanced loans as long as their mortgages do not exceed 105 percent of the current value of their property. But with housing prices in a free fall in parts of the country, including Florida, California and Arizona, that will not be enough for many homeowners.
"We think that 105 percent [loan-to-value ratio] should be revisited," said Steve O'Connor, senior vice president for government affairs at the mortgage bankers' group.