SACRAMENTO – Keep Your Home California announced today changes to help more low and moderate income homeowners, who are struggling with their monthly mortgage payments, remain in their homes as part of the free mortgage-assistance program.
The changes will assist homeowners who have suffered a financial hardship attain an affordable monthly mortgage payment and provide them with an opportunity to solve their mortgage troubles, before they fall behind on their payments.
For homeowners who have already fallen behind on their monthly payments, Keep Your Home California more than doubled the amount of funding that is available to help homeowners catch-up on past due mortgages. The state program, which is overseen by the California Housing Finance Agency (CalHFA), can provide up to $100,000 in assistance to eligible homeowners.
“Despite an improving economy and job market, there are still many homeowners who are struggling every month or just need a little help to get back on track with their payments,” said Tia Boatman Patterson, Executive Director of CalHFA. “Our goal is to help California homeowners prevent avoidable foreclosures, and the changes to the program are the latest in that effort.”
The program criteria changes affect the Principal Reduction Program, which allows homeowners with unaffordable monthly mortgage payments to apply for as much as $100,000 in assistance to reduce the principal balance. Principal reductions often lead to savings of hundreds of dollars each month on homeowners’ mortgage payments.
David Dayen spots a new blow for underwater homeowners that thus far has flown under the radar: the coming expiration of the Mortgage Forgiveness Debt Relief Act of 2007, scheduled for Dec. 31.
The act is a mouthful, but it’s been a crucial factor in helping countless families get out from under bad mortgages. Simply put, the act relieves homeowners from having to pay taxes on any loan forgiveness they receive in a mortgage restructuring. (The maximum exemption is $2 million for a couple.) The measure was originally set to expire last Dec. 31, but it was extended another year by the fiscal cliff deal.
The foreclosure crisis is ebbing, but the relief is still needed. Millions of families are still underwater and facing delinquency, default, and foreclosure. As Dayan notes, those who succeed in obtaining principal reductions will be getting a bill that’s almost certain to be unaffordable.
As an additional irony, the act’s expiration comes just as JPMorgan, one of the banks that contributed massively to the housing crisis, reaches a deal that gives it a tax break on its multibillion-dollar settlement of federal charges related to the disaster.
He suggests folding an extension of the homeowner relief act into the JPMorgan settlement, but the extension looks like something that would have to clear Congress all by its lonesome. What are the chances of that? Congress has a lot to do as the end of the year looms. Somehow the things that aren’t on its agenda are all needed to help the less advantaged of society — food stamp extensions and now mortgage relief. Come New Year’s Day, we’ll be asking once again: Who do the people on Capitol Hill work for?
Borrowers have faced major hurdles in trying to access the aid. Joshua and Catherine Brewster sought help after Josh lost his job as a legal assistant at Hilton Hotels when a reorganization moved his division out of state.
They battled for a year for a modification from their servicer, Bank of America, to help with their $2,300-a-month mortgage payment. Then they got transferred to the state Housing Finance Agency.
Many additional battles over the loan terms followed, they said, before the Keep Your Home California program approved $47,000 in principal reduction. Their interest rate also was cut to 3.75%, and in January payments fell to $1,676 a month, which they say they can handle.
“We had to fight,” Josh said. “People are not conditioned to challenge the banks. It was brutal.”
State officials said they hope to hear fewer such stories as the pipeline of loan modifications swells, mainly because Bank of America, Wells Fargo Bank and Chase Bank — the biggest providers of mortgage customer service — all have now agreed to use the funds for principal reduction.
Bank of America began doing Keep Your Home California principal reductions in March 2011. But many banks, including Wells and Chase, were slow to sign on, in large part because Fannie Mae and Freddie Mac were opposed to lowering the balance owed on mortgages. Wells and Chase began writing down loan balances this year.
“We have the funding to help many, many more homeowners with our free assistance,” Claudia Cappio, head of the California Housing Finance Agency, said in a statement Monday. She encouraged anyone having difficulty with their mortgage to call the program at (888) 954-5337.
Borrowers seeking principal reductions must show that they owe more than their homes are worth and also must show that they are financially troubled — a requirement that has proved problematic, Richardson said.
“I still think [the money] should be flying out the door, and it’s not,” she said. “People have a hard time documenting hardship.”
The past five years have been bad enough. But for tens of thousands of California families, 2013 threatens even more misery.
Wells Fargo will be more responsible than any other single mortgage servicer if this economic storm hits California in 2013. The bank is responsible for servicing 11,616 of the mortgages that are in the foreclosure pipeline—nearly one in five of all California homes in this foreclosure pipeline.
But there is an alternative. Economists and policy experts from across the political spectrum are calling for the widespread reduction of the principal on these mortgages.
As we explain below, principal reduction is the fair and common sense solution to this crisis and the key to digging the economy out of its five year slump.
Many experts believe that even servicers like Wells Fargo would eventually benefit from widespread principal reduction.
By clarifying the value of the mortgage-backed securities that are owed the banks, the bondholders, and Fannie Mae and Freddie Mac, and by significantly stimulating the economy, principal reduction would stabilize the housing market and it would effectively put a floor on securities prices. This would help all investors, including banks.
At the moment, however, Wells Fargo remains committed to a shortsighted and selfish approach. Notably, several other banks, including Bank of America, have pursued broader principal reduction as a strategy for maintaining their profits while also helping families retain their homes.
Wells Fargo’s average principal reduction on first-lien mortgage modifications was $74,837, compared to Bank of America’s $192,090. And, during this period, Bank of America gave out nearly $1 billion more in principal reduction in California than Wells Fargo did!
But while thousands of California families struggle daily to make ends meet and face the terrifying prospect of losing their homes, Wells Fargo and its multi-millionaire executives prioritize their short-term profit margins, and the American people are paying the price.
Wells Fargo’s CEO is John Stumpf. The bank paid him $19.8 million in 2011. Since 2007, when the housing market collapsed, Stumpf has raked in nearly $84 million!
Wells Fargo’s other executives have also done exceedingly well, while California’s families suffer: In 2011, its seven key executives were together paid over $72 million.
The average homeowner in the foreclosure pipeline is approximately $95,000 underwater – which means that, on average, each of Wells Fargo’s key executives could keep a one million dollar salary and still have enough left over to personally save nearly 100 homes.
Wells Fargo’s conduct would be atrocious enough if it applied to everyone equally, but the bank has come under intense scrutiny in recent years because its practices have been specifically targeted at African-Americans and Latinos.
The U.S. Department of Justice’s Civil Rights Division determined that mortgage brokers working with Wells Fargo had charged higher fees and rates to tens of thousands of minority borrowers across the country than they had to white borrowers who posed the same credit risk – selling what Wells fargo employees im Baltimore referred to as “ghetto loans.”
First, Wells Fargo should commit to a broad principal reduction program.
Second, Wells Fargo should report data on its principal reduction, short sales, and foreclosures by race, income, and zip code.
Third, Wells Fargo should immediately stop all foreclosures until the first two policies are implemented.
The biggest recent change to Keep Your Home California was deemed an “aggressive, out-of-the-box idea that yielded positive results” by Claudia Cappio, executive director of the California Housing Agency, which oversees the program.
The change was made in order to increase accessibility to the program for struggling homeowners and involves KYHC officials eliminating the dollar-for-dollar match for servicers, and taking on the full financial responsibility of the principal reduction, writes Cappio in a Treasury blog post.
The change plays out like this: mortgage servicers need to approve the principal reduction application before they modify or recast the loan with the new principal amount, creating a more affordable and sustainable mortgage for the homeowner.
According to Cappio, the results have been astounding. “Keep Your Home California now has almost 60 mortgage servicers participating in the Principal Reduction Program, including Bank of America, JPMorgan Chase and Wells Fargo,” she writes.
Cappio says more servicers on board means more homeowners are now applying and being approved for the program – a 47% increase in fourth-quarter 2012 compared to one-year prior.
Bank of America Corp. has amassed $64 billion of mortgages that are at least six months delinquent and have yet to enter foreclosure, more than twice the amount held by its four largest competitors combined.
The loans are monitored as part of February’s $25 billion settlement between the top five U.S. lenders and state attorneys general over allegations of abusive foreclosure practices. Bank of America’s stockpile of deteriorating debt is mostly from its 2008 acquisition of Countrywide Financial Corp., once the nation’s largest mortgage provider. Wells Fargo & Co., the biggest U.S. servicer, has $15.3 billion of such unpaid loans.
The data, published last month by the monitor of the settlement, highlight Bank of America’s vast backlog of delinquencies, and the years it will take to work through them as borrowers fall further behind and losses mount for investors in mortgage-backed securities. While the Charlotte, North Carolina-based bank has begun modifications for many of its 275,000 homeowners at least 180 days behind as of Sept. 30, some will join the already clogged U.S. foreclosure pipeline.
“There’s just a long tail to work out all of these loans, which are severely delinquent at this point,” said Marty Mosby, an analyst with Guggenheim Securities LLC in Memphis, Tennessee.“It just shows the amount of work that’s still left to do.”
Delays in processing the loans add to the expenses borne by investors because maintenance, property taxes and other costs add up. While rising prices may make the mortgage-backed securities more valuable, servicers can be forced to come up with cash to cover interest payments from the delinquent loans and modifications become more difficult to accomplish as the borrower’s unpaid debt grows.
Bank of America’s portfolio of loans that are at least six months old and not in foreclosure accounts for 3.3 percent of all of the mortgages it services. Citigroup Inc. has 1.1 percent of its loans in that category and Ally Financial Inc., Wells Fargo and JPMorgan Chase & Co. each have less than 1 percent.
Bank of America has about 930,000 loans that are at least 60 days delinquent, down from 1.5 million from the peak in January 2010, Chief Executive Officer Brian Moynihan, 53, said during a Dec. 14 event at the Brookings Institution in Washington.
Borrowers will likely stay current on their mortgage after a principal write-down whether they share future equity returns with the bank or not, according to new shared appreciation program data.
Select borrowers can receive a principal reduction from Ocwen Financial Corp., but those back above water over three years but must agree to share 25% of the appreciated value after that time through a program the subprime servicer launched last summer.
Roughly 12.6% of the roughly 20,000 borrowers who took advantage of the program redefaulted within 12 months according to a report Morningstar Credit Ratings released this week.
That is above the 10% redefault rate for Home Affordable Modification Program workouts, but below the nearly 16% rate on private modifications.
A report this summer from Laurie Goodman at Amherst Securities showed borrowers who received a principal reduction in 2011 redefaulted at a 12% rate within in the first 12 months.
That’s right on par with Ocwen’s program, and the bank or investor gets some of the equity back.
Ocwen has faced much criticism from community groups and borrowers after the foreclosure crisis struck. Just 853 of its more than 5,000 employees live in the U.S. with the rest in India and Uruguay, and many borrowers complain of paperwork labyrinths and call center runarounds.
To provide relief more quickly under the settlement, Chase executives are addressing the borrower fatigue with a letter sent to borrowers notifying them that their loan was refinanced into a new mortgage with a lower interest rate. No documentation was needed. Chase owned the loan.
Borrowers receiving these letters saved an average of $300 per month on their payments, according to a statement from the bank sent to HousingWire.
Chase is sending different letters to other underwater borrowers. All that is required in order for a principal reduction on their loan is a signature sent back with the included self-addressed stamped envelope the bank provides.
Roughly half of the borrowers targeted by most major servicers for principal write-down consideration agree to the deal. But nearly all of the borrowers who received a letter from Chase, sent it back with a signature, according to the bank.
“Chase is taking a proactive approach to helping homeowners. We are automatically reducing interest rates for eligible customers who are current on their mortgage payment, saving them hundreds of dollars each month,” a Chase spokeswoman said. “For many individuals and families who are struggling with their mortgage, we are lowering their payments by sending them pre-qualified modification offers, which may include principal forgiveness.”
WASHINGTON — After a lengthy review, a key federal regulator said Tuesday he would not allow Fannie Mae and Freddie Mac to lower the amount some underwater homeowners owe on their mortgages despite new financial incentives from the Obama administration.
Detailed analysis has determined that principal reductions would cost taxpayers money and would not clearly improve the ability of homeowners to avoid foreclosure, said Edward DeMarco, acting director of the Federal Housing Finance Agency. The agency oversees Fannie Mae and Freddie Mac, the housing finance giants that were seized by the government in 2008 as they teetered on the brink of failure.
The Obama administration, Democratic officials and housing advocates have been pressuring DeMarco to allow Fannie and Freddie to lower the principal for underwater homeowners as a way of reducing foreclosures. Fannie and Freddie own or back about 60% of all mortgages. Some, including California Atty. Gen. Kamala Harris, have called for Obama to fire DeMarco because of his refusal to allow Fannie and Freddie to reduce principal.
But DeMarco has steadfastly refused out of concern that it would increase the cost of the taxpayer bailouts of Fannie and Freddie. As of June 20, taxpayers have pumped $188 billion into the two companies to keep them afloat. The companies have paid about $46 billion in dividends back to the Treasury Department in exchange for that assistance, leaving taxpayers on the hook for about $42 billion.
The FHFA has been reconsidering the position because of new Treasury incentives tripling the amount of money offered to owners of mortgages to do principal reductions.
But DeMarco said those incentives were still taxpayer money and did not offset the potential harm from a principal reduction program. He said such a program could encourage underwater homeowners who are making their payments to stop so they could qualify for a principal reduction. The FHFA analysis found that it would take just 3,000 to 19,000 borrowers out of 1.4 million underwater borrowers to offset any potential positives to the bottom-line of Fannie and Freddie from principal reductions.
“We weighed these potential benefits and costs, recognizing the inherent uncertainties associated with these estimates … and we concluded that the potential benefit was too small and uncertain relative to known and unknown costs and risks to warrant Fannie and Freddie” offering principal reductions, DeMarco told reporters.
He stressed that Fannie and Freddie offer an array of programs to help struggling homeowners, including those that lower monthly payments.
Treasury Secretary Timothy F. Geithner wrote to DeMarco on Tuesday asking him to reconsider his position.
“Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes and the legacy of the crisis continues to weigh on the market,” Geithner said. “You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis.”
A Georgetown law professor is proposing that a Resolution Trust Corporation (RTC) like entity might be the key to getting the housing market back on track.
In Clearing the Mortgage Market through Principal Reduction: A Bad Bank for Housing (RTC 2.0) Adam J. Levitin considers ways in which negative equity problems might be addressed and assesses the feasibility of using a “bad bank” entity for pooling and standardized restructuring and resecuritization of underwater mortgages. This is the first of two MND articles summarizing the paper which Levitin wrote for The Big Picture, a Wall Street oriented blog.
Levitin says that the housing market is not clearing and has not since at least 2008 and possibly 2006. He defines “clearing” as a climate in which willing buyers and willing sellers are able to meet on a price. One reason for this failure is negative equity which currently affects 27.1 percent of all residential mortgages. The average negative equity is $65,000, considerably greater than the average household disposable income of $49,777.
“The depth of negative equity,” Levitin says, “is likely to increase as housing prices drop” due to foreclosures and lack of upkeep on properties where homeowners see no upside to further spending. Negative equity impedes clearing because even where buyer and seller are able to meet on a price they often cannot close the deal because the seller cannot pay the additional $65,000.
At the heart of the problem then is that mortgages, unlike houses, are not marked to market but are carried at book value. If they were marked to market they would track home values but a change in accounting is unlikely and ill-advised so we must look to other ways of clearing the market.
To date there has been only one – foreclosure, a method that is slow, inefficient and rife with negative externalities on neighbors, communities, and local governments. Foreclosures can also result in over-clearing. For various reasons the market for distressed properties is thin, bids are heavily discounted, and market prices are driven even lower.
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