Struggling Homeowners Need More Help

The chairwoman of a congressional housing committee today called for increased measures to help homeowners whose mortgages are greater than the value of their homes.

In the past year, 1.4 million trial loan modifications have taken place but only 230,000 modifications have been made permanent, said Rep. Maxine Waters (D-Calif.), chairwoman of the Housing and Community Opportunity Subcommittee of the House Financial Services Committee. At the same time, performance on home mortgages serviced by the largest national banks and thrifts continued to decline through the end of 2009. While foreclosures decreased from January to February, the February figures are still 6% higher than February, 2009.

Waters called for stronger foreclosure intervention programs, including a $3 billion provision she authored in financial service reform legislation. Her plan passed the House in December and would provide assistance to unemployed homeowners facing foreclosure -- "a much more robust program than what the Treasury Department has proposed."

She also called for principal reduction programs, citing data that the average borrower in Southern California would not get out from being "underwater" until 2016.

What's Good for the Goose...

"Increasingly, I am unconvinced that these voluntary programs are going to provide the assistance that homeowners desperately need," Water said. She was critical of statements by bank officials that principal reduction programs are unfair and cause market distortions. "When these financial institutions find themselves underwater on their own real estate investments, they themselves often stop making payments," she said, citing Morgan Stanley's decision to stop making payments on five underwater office buildings in San Francisco.

When the Mortgage Bankers Association found itself underwater on its headquarters, it was able to rely on other lenders to get out from under the unsustainable mortgage, she added. "Unfortunately, it seems that many of their members oppose giving homeowners the right to do the same."

Servicers continue to construct barriers for people trying to get loan modifications, Waters said, pledging to work for mandatory loss mitigation legislation.

Falling Short

Rep. Shelley Moore Capito (R-W.Va.), ranking member of the subcommittee, said the administration's Home Affordable Modification Program "has fallen woefully short." As of March 12 only 170,000 homeowners had received permanent modifications, she said.

The administration has over-promised what can be done to help homeowners, and the programs that have been created provide the perverse incentives for people not to repay mortgages, Capito said. "The problems we are now seeing in the housing markets are less related to exotic mortgage products. Are we creating a moral hazard here for future homeowners that will give them less incentive to pay their mortgages on time and purchase a home that is well within their means? Is it fair to the vast majority of Americans who own their home outright or are current on their mortgage that some Americans who are not as responsible with their financial decisions are now receiving these benefits?"

The new revisions announced by the administration in March allow borrowers to refinance into the Federal Housing Administration program, which is already struggling with its capital reserve fund below the mandated 2% level, Capito said.

Signs of Stabilization

Mortgage servicers have been slow to implement the Home Affordable Modification Program, Federal Housing Administration Commissioner David Stevens told the housing subcommittee. But Stevens said that the programs announced March 26 "have accelerated the pace of modifications," and there are signs of stabilization in the housing market. The adjustments to Federal Housing Administration programs will offer between 3 million and 4 million underwater homeowners the chance to restructure their loans through the end of 2012.

Stevens told the housing subcommittee that the changes, in addition to other changes made to the Home Affordable Modification Program, the largest loan modification the nation has seen, "will help the administration meet its goal of stabilizing housing markets" by offering a second chance to struggling homeowners.

The changes, which are voluntary, permit lenders to provide additional refinancing options for borrowers who are current on their mortgage if the lender reduces the amount owed by at least 10%. The loan program, financed by the private sector and the federal government's Troubled Asset Relief Program, "will provide more opportunities for qualifying mortgage loans to be responsibly restructured and refinanced into FHA loans," Stevens said. In answer to questions about the impact of the programs on FHA's capital levels, he said the programs "should not expose FHA to further risk.

With record low mortgage rates and help from mortgage modification programs, more than 4 million homeowners have refinanced their mortgages, saving more than $7 billion in the past year, Stevens said. Home equity increased by more than $13,000 for the average homeowner in the last three quarters of 2009.

The Rules

Eligible homeowners for the new FHA refinance option must live in an owner-occupied principal residence and have a mortgage balance of less than $729,750. Lenders must agree to write down the balance of the underwater loan to a sustainable level, and the new monthly mortgage payments must not be greater than 31% of their income.

Stevens said that the government "cannot and should not help everyone." Investors and speculators should not be protected, nor should Americans living in million-dollar homes or defaulters on vacation homes. "Some people simply will not be able to afford to stay in their homes because they bought more than they could afford."

An estimated 11 million to 15 million mortgages, about a fourth of outstanding mortgages, exceed the value of the home, Stevens said. But he said it is difficult to know how many of these underwater mortgages are for owner-occupied homes. Moreover, most underwater homeowners are current on their mortgages.

"The administration is keenly aware of the potential for moral hazard in principal reduction and has carefully designed the guidelines of the principal write-down enhancements to FHA and HAMP to discourage borrowers from purposefully becoming delinquent on their loan," which is why they must be current on their loan payments, Stevens said. Total mortgage debt for the borrower after refinancing can not be greater than 115% of the current value of the home, which should give homeowners a way to regain equity in their homes and affordable monthly payments.

A second lien write-down program will be paired with the changes to encourage write-downs of second liens, Stevens said. About half of underwater homeowners have a second lien in addition to their primary mortgage, he said.

A Growing Willingness to Help

As housing prices have stabilized, servicers have been more willing to write down mortgages, he said, citing Bank of America (BAC), which announced a new initiative March 24, and Wells Fargo (WFC), which last year wrote down $2.6 billion in principal for borrowers of option ARM loans. "We are encouraged that lenders are increasingly offering mortgage relief through principal write-downs for struggling borrowers," Stevens said.

The administration has moved aggressively to change and expand programs to help at-risk homeowners, said Phyllis Caldwell, chief of the Treasury Department's Homeownership Preservation Office. Documentation requirements have been increased for trial modifications, and established concrete time frames for servicer responses.

To assist unemployed homeowners, services will be required to reduce their mortgage payments temporarily to affordable levels for at least a few months, and if the homeowner does not find a job, he or she will be evaluated for permanent assistance or could be eligible for a short-sale program.

Servicers will soon be required to consider an alternative modification approach that emphasizes principal relief in order to expand the use of principal write-downs, Caldwell said. Servicers will be asked to consider principal write-down balances above 115% of current loan-to-value, and eligible homeowners will earn the forgiveness on a pay-for-success basis.