On Friday, January 27, 2012, the Obama Administration (the "Administration") published a paper (the "Plan"), which among other announcements as outlined below, extended and expanded the Home Affordable Mortgage Program ("HAMP"). Notably with respect to HAMP, the Administration announced a series of steps to extend the reach of HAMP to a broader pool of homeowners, including tenants at risk of displacement due to foreclosure, and provide more robust relief to those who participate . On February 1, 2012, the Administration set forth some details of the Plan for the FHA and GSE programs.

The non-GSE program provides that any borrower meeting the following criteria would have the opportunity to refinance:

  • current on their loan for the past six months and have missed no more than one payment in the six months prior,
  • a current FICO score of at least 580,
  • existing loan is no larger than the current FHA conforming loan limits in their area,
  • refinancing is for a single family, owner-occupied principal residence, and
  • loan-to-value limits which could require lenders interested in refinancing deeply underwater loans (e.g. greater than 140 LTV) to write down a portion of the balance of these loans before they qualify.

The estimated $5-$10 billion cost of the Plan would be paid for by a fee on the largest financial institutions.

The GSE program consists of a number of elements including:

  • eliminating appraisal costs for all borrowers,
  • increasing competition so borrowers get the best possible deal,
  • extending streamlined refinancing for all GSE borrowers, and
  • giving borrowers the chance to rebuild equity in their homes through refinancing.

The Administration believes that the aspects of the Plan involving the GSEs are within the existing statutory authority of the FHFA and do not require additional Congressional involvement. However, because the GSE's have not acted to implement these changes, the Administration indicated that it will seek Congressional action to eliminate appraisal costs by using a different valuation model, facilitate competition for HARP participation, and extend streamlined refinancing to all GSE borrowers.

There has been criticism of the implementation of foreclosure mitigation programs for some time. A June, 2010 Report of the General Accountability Office (GAO) concluded that further actions were needed to fully and equitably implement foreclosure mitigation programs. GAO Report, Troubled Asset Relief Program: Further Actions Needed to Equitably Implement Foreclosure Mitigation Programs.

The Plan includes a number of additional elements:

1. Establishing a Home Owner Bill of Rights working with the CFPB that imposes significant new sets of requirements on servicers.

2. Pilot Sale Initiative to Transition REO Property to Rental Housing to stabilize neighborhoods and improve housing prices.

3. Providing a full year of forbearance for unemployed workers.

4. Establishment of a Joint Investigation Team to investigate mortgage origination and servicing abuses.

5. Funding for programs to put people back to work in rehabilitation projects.

6. Expanding HAMP eligibility. This would include:

Extending the Administration's Mortgage Modification Program for Another Year

HAMP is currently set to expire in December 2012. Under the proposal, the program deadline will be extended for another year through December 31, 2013.

Expanding Eligibility to Reduce Additional Foreclosures and Help Stabilize Neighborhoods

The proposal seeks to expand the eligibility for HAMP in order to reach a broader pool of distressed borrowers. Additional borrowers will now have an opportunity to receive modification assistance that provides the same homeowner protections and clear rules for servicers established by HAMP. This includes:

  • Creating opportunities to extend HAMP eligibility to those with a first-lien mortgage debt-to-income ratio below 31% but with additional liens and medical bills, as well as to non-owner occupied homes. Currently, if a borrower's first-lien mortgage debt-to-income-ratio is below 31%, that borrower is ineligible for a HAMP modification.
  • Preventing additional foreclosures by expanding the program's eligibility to properties that are currently occupied by a tenant or which the borrower intends to rent.

Increasing Incentives for Cost-Effective Mortgage Modifications that Help Borrowers Rebuild Equity in Their Homes

Currently, HAMP includes an option for servicers to provide homeowners with a modification that includes a write-down of the borrower's principal balance, when a borrower owes significantly more on their mortgage than their home is worth. These principal reduction modifications help both reduce a borrower's monthly payment and rebuild equity in their homes. To further encourage investors to consider or expand use of principal reduction modifications, the Administration will:

  • Triple the incentives offered to investors holding distressed loans to encourage them to participate in reducing the principal for these loans. Currently, the owner of a loan that qualifies for HAMP receives between 6 and 21 cents on the dollar to write down principal on that loan, depending on the degree of change in the loan-to-value ratio of the individual loans. Under the new guidelines, Treasury will triple those incentives, paying from 18 to 63 cents on the dollar to investors, depending on the degree of change in the loan-to-value ratio of the individual loans.
  • Offer principal reduction incentives for loans insured or owned by the GSEs. HAMP borrowers who have loans owned or guaranteed by Fannie Mae or Freddie Mac do not currently benefit from principal reduction loan modifications. Significantly, and unlike other programs where the cost is absorbed by the GSE's, to encourage the GSEs to offer this assistance to its underwater borrowers, Treasury has notified the GSE's regulator, the FHFA, that Treasury will pay principal reduction incentives to Fannie Mae or Freddie Mac if they allow servicers to forgive principal in conjunction with a HAMP modification.

Six Significant Observations

1. The Plan comes at a time of increasing conflict between the FHFA and the Administration. This is highlighted in the continued tension between the FHFA mandated GSE loss mitigation and "preservation and conservation of assets" efforts and those public policy efforts which the Administration and others believe are necessary to help address the housing crisis. The FHFA recently released an analysis of principal forgiveness as a loss mitigation tool which questioned the effectiveness of principal forgiveness as a loss mitigation tool. The FHFA's Statement on January 27, 2012 responding to the announcement of the Plan did not endorse the Plan or commit to implement it. In January, the Federal Reserve Board issued a white paper which concluded that the FHFA's loss mitigation efforts were having a negative impact on the housing recovery and that the GSE's need to do more in the way of mortgage modifications and foreclosure prevention efforts in order to stabilize housing prices and keep people in their homes.

2. The imposition of new and enhanced borrower protection and outreach programs by the CFPB, in addition to making foreclosure increasingly more difficult, will add to the already burdened servicing industry which is straining under the pressure of national settlement attempts over servicer abuses and foreclosure related litigation.

3. The Joint Investigation Task Force will mean a significantly increased level of enforcement actions and prosecutions - especially in the servicing area.

4. Servicers should conduct their own assessment and compliance audits of their practices and procedures in advance of action by the CFPB and the Joint Investigation team to prevent or mitigate enforcement action.

5. As noted, the estimated $5 to $10 billion cost of the Plan would be financed by a new fee on financial institutions. This controversial fee idea was previously proposed by the Administration and widely criticized in Congress. The Plan's reliance on a fee that is highly unlikely to become law has led many observers to suggest that the Plan was offered to influence the November elections, and not as a serious policy proposal.

6. Nonetheless, if the proposed "big bank tax" somehow managed to be adopted to pay for this program, it would represent another increased cost of doing business, that, taken together with capital increases and surcharges and enhanced liquidity requirements, would make it increasingly difficult for banks to achieve adequate return on equity for shareholders.

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