A $7.6-billion federal program to help unemployed homeowners stave off foreclosure has provided little relief two years after being unveiled, with less than $218 million of the money paid out to needy borrowers as of Jan. 1.
California, which was allocated nearly $2 billion from the Hardest Hit Fund, provided less than $38.6 million in assistance for 4,357 borrowers by the end of last year, according to the state’s latest report to the Treasury Department.
That amounted to less than 2% of the federal funds available to the state’s Keep Your Home California program.
“It’s about helping the homeowner, and that’s not happening,” said Bruce Marks, head of the foreclosure counseling group Neighborhood Assistance Corp of America. “As we speak, there are thousands of people losing their homes.”
State officials said another reason for the program’s poor performance was that lenders would not go along with a plan to write down mortgage balances.
California, Nevada and Arizona jointly devised a plan to provide mortgage relief funds to struggling borrowers only if banks and loan investors agreed to reduce the principal owed on the loan by a matching amount. For instance, a $25,000 principal reduction from the lender would be doubled, producing a $50,000 benefit to the borrower.
State officials say banks, loan investors and the government-owned mortgage giants Fannie Mae and Freddie Mac declined to go along with the plan.
“I think the biggest reason is the banks are not participating in the principal-reduction piece,” said Diane Richardson, legislative director for the California Housing Finance Agency, which developed the state’s program. “They are choosing not to participate for whatever reason.”
California is now considering helping homeowners without lender participation, state housing agency spokeswoman Evan Gerberding said.
The regulator over Fannie Mae and Freddie Mac pushed back against mounting pressure that the mortgage finance giants start reducing the principal owed on troubled loans, insisting the practice could hurt taxpayers and that alternatives were better at avoiding foreclosures.
Edward J. DeMarco, acting director of the Federal Housing Finance Agency, told U.S. senators Tuesday that reducing the principal on mortgages owned or guaranteed by Fannie and Freddie would not protect taxpayers.
The government has pumped about $183 billion in taxpayer money into the companies, which the agency seized in 2008 as they teetered on the brink of bankruptcy.
Lawmakers, especially Democrats, have maintained that the agency needed to direct Fannie and Freddie to write down the mortgage principal on loans that exceeded the value of homes when struggling borrowers were facing foreclosures.
Five of the nation’s major banks agreed to similar terms to settle a nationwide lawsuit. Fannie and Freddie, which own or guarantee 60% of existing mortgages and back 75% of all new mortgages, was not part of that lawsuit.
DeMarco said executives at Fannie and Freddie advised him that it wasn’t “in the best interest of the companies” to write down mortgage principal to reduce foreclosures. The companies would lose part of the total amounts lent out.
He touted other steps, such as interest rate reductions that Fannie and Freddie have approved, to help keep struggling homeowners from defaulting.
“Foreclosure is the worst possible outcome in most instances. It is the most costly, it is the most devastating to the family, and it is the most devastating to the neighborhood,” DeMarco told the Senate Banking Committee.
The agency has “a responsibility to find all prudent actions” to prevent foreclosures, he said. Refinancing, modifying the lengths of loans and deferring payments on mortgage principal are more effective at keeping people in their homes without increasing the risk of losses at Fannie and Freddie, DeMarco said.
Democrats argued that principal reductions would help stabilize the housing market, ultimately reducing taxpayer losses on the Fannie and Freddie bailout because mortgages would not end up in foreclosures.
“In my view, the FHFA has shown a dismal lack of initiative in the housing crisis and needs to be far more aggressive in taking steps that can help both homeowners and taxpayers,” said Sen. Robert Menendez (D-N.J.).
“The banks are finding it profitable to give principal reductions to about 20% of their own loans while, ironically, the government isn’t allowing principal reductions on any loans,” he said.
Housing and Urban Development Secretary Shaun Donovan said that principal reduction was the one foreclosure-prevention tool that the administration has made the least progress in employing.
But FHFA is an independent agency. DeMarco had been chief operating officer at the agency and became acting director in 2009. The White House has tried to replace him, but Senate Republicans blocked confirmation of President Obama’s nominee for the job.
Republicans, who oppose more government intervention in the housing market, praised DeMarco. But he acknowledged that “there appears to be a lot of criticism” of his performance.
California Atty. Gen. Kamala D. Harris has called on DeMarco to resign.
In a letter released Monday, she asked him to freeze foreclosures in the state until the agency did a “thorough, transparent analysis of whether principal reduction is in the best interests of struggling homeowners as well as taxpayers.”
Also Monday, 115 House members wrote to DeMarco to urge him to allow Fannie and Freddie to write down loan principals.
California’s attorney general has asked for a suspension of foreclosures on loans controlled by Fannie Mae and Freddie Mac.
Atty. Gen. Kamala D. Harris in a letter asked the regulator of the government-controlled mortgage titans to halt foreclosures in California until the agency has completed a “thorough, transparent analysis of whether principal reduction is in the best interests of struggling homeowners as well as taxpayers.”
It is not the first time that Harris has tangled with the giants — last year she sued the two mortgage giants after they refused to answer subpoenas regarding their mortgage and foreclosure practices. That case remains pending.
Harris has also called on Edward DeMarco, the head of the Federal Housing Finance Agency that regulates Fannie and Freddie, to step down, accusing him of not doing enough for borrowers.
Harris’ request for a foreclosure pause comes on the heels of a multistate mortgage settlement that will require the nation’s largest mortgage servicers to reduce principal for certain borrowers. California has secured $12 billion in principal reduction and short sales from those banks, but Fannie and Freddie are not part of that deal.
Harris’ office sees the two giants as key to getting the housing market back on track, estimating that more than 60% of outstanding loans in the Golden State are controlled by them. But DeMarco has resisted principal reductions, which is the writing-down of mortgages of borrowers, arguing that the results of those reductions are not worth the costs.
The FHFA has overseen Fannie and Freddie since the two mortgage giants were placed under government control in 2008 as the financial crisis picked up steam. Calls to the agency were not returned.
When the principal reduction program was rolled out two years ago, those incentive payments weren’t extended to Fannie and Freddie, and their regulator has said there are less costly ways to help borrowers avoid foreclosure. The firms are being propped up with massive taxpayer infusions of their own, and the FHFA is tasked with preserving the firms’ assets.
By providing new taxpayer funds, the administration is making it harder for the FHFA to maintain its stance that principal reduction is less costly because Treasury funds will effectively subsidize some of those losses. The FHFA has said it is currently evaluating the newest proposal.
The firms are “working right now…to make a decision on whether they are going to begin principal reduction,” said Mr. Donovan. “We certainly hope that they will start to do that based on these incentives. That’s why we made them available.”
California walked away with the biggest chunk of this week’s landmark foreclosure settlement partly because of the state’s size but also because of Bank of America’s desire to escape the legacy of its Countrywide problems.
The nation’s three largest mortgage servicers — Bank of America, JPMorgan Chase and Wells Fargo & Co. — committed to provide California $12 billion in principal write-downs, including through short sales, over the next three years, the single largest such commitment to come out of the negotiations. About 250,000 Californians are covered under that part of the deal, struck between five big mortgage lenders, states and the federal government.
Taking into account a complex series of credits designed to encourage the banks — which also included Ally Financial and Citibank — to make payments to homeowners, California’s share of the settlement could climb to as much as $18 billion. That aid would go to an estimated 460,000-plus borrowers, many in areas of the state hit hardest by the housing bust, according to the state attorney general’s office.
“This outcome is the result of an insistence that California receive a fair deal commensurate with the harm done here,” Atty. Gen. Kamala D. Harris said Thursday in announcing the settlement.
“California gets an extraordinary amount of it,” said Iowa Atty. Gen. Tom Miller, who led the negotiations for the state attorneys general. “That’s one of the things that amazed us as we went through this — how much problem there was in California.”
California’s participation in the settlement, a prospect that was in jeopardy until the last minute, also helped increase the size of the deal, including for other states.
“They are by far the most important mortgage lending state in the country, and as a result are the most important foreclosure state,” said Guy Cecala, publisher of Inside Mortgage Finance. “It is crucial to have them as part of a settlement.
“These banks badly need to get back in the business of processing foreclosures,” Cecala said, “and it is a huge deal if you don’t have the California attorney general breathing down your throat.”
Key to Harris was getting a significant amount of principal reduction for borrowers. Under the terms of the deal, banks can write principal down to the current value of the loan, or so the monthly mortgage payments make up only 31% of a borrower’s income, according to the person familiar with the deal.
If the banks don’t fulfill the $12-billion guarantee, they will have to make cash payments of up to $800 million directly to the state, a provision that is enforceable in California court, instead of federal court in Washington, where the rest of the deal is covered.
Incentives will direct aid to areas hardest hit by the foreclosure crisis, a “Stockton provision” that Harris sought after a visit this year to that foreclosure-ravaged city, negotiators said. Those areas are to receive relief within the first year.
The Treasury Department will triple payments to mortgage investors for reducing borrower principal through an expanded Home Affordable Modification Program announced Friday.
Officials announced several critical changes to HAMP, including an enrollment extension to Dec. 31, 2013, from its original expiration date at the end of this year.
The Treasury will also require servicers to factor in second liens and other obligations in the debt-to-income ratio calculation. Previously, if a borrower’s first-lien mortgage monthly payment was below 31% of the income, the borrower was deemed ineligible. Factoring other debts to the DTI evaluation will expand the pool of borrowers who could receive the assistance.
To combat blight, officials said they would also expand HAMP toinvestors who are renting properties to tenants.
Since HAMP launched in March 2010, more than 900,000 permanent modifications have been conducted. The Treasury originally estimated the program to reach between 3 million to 4 million borrowers. As of Dec. 1, less than 1 million were estimated to be eligible for the program under past rules.
Of the modifications already given, roughly 36,400 resulted in reduced principal as of Dec. 1. The Treasury paid between six and 21 cents to the investors for each dollar forgiven under HAMP, but that will grow to between 18 and 63 cents, under the rule changes.
In a conference call Friday, Treasury Assistant Secretary Tim Massad would not estimate how many borrowers would be eligible after the changes, but he did say mortgage servicers were signaled some expansion, even for principal reduction.
“We have previewed the changes with the servicers,” Massad said. “We got a very positive initial reaction.”
Department of Housing and Urban Development Secretary Shaun Donovan said in the conference call Friday that the Treasury would make these payments to Fannie Mae and Freddie Mac if they participate in the principal reduction program. To date, the GSEs have not committed to such a program.
Both GSEs owe the Treasury $151 billion in bailouts, and their regulator the Federal Housing Finance Agency said a wide-scale principal reduction program would cost Fannie and Freddie $100 billion.
Of the $29.9 billion allocated for HAMP and other housing programs, the Treasury has spent only $2.3 billion. The Treasury still owes another $9 billion to $10 billion for the modifications already done, Massad said.
Donovan renewed calls for servicers to ramp up principal reductions, and reiterated that they would be a main tool in crackdowns stemming from the ongoing foreclosure settlement talks and the securitization investigations launched this week.
“These changes aren’t going to solve all the problems in the housing market, but they shouldn’t have to wait for the market to hit bottom before getting some relief,” Donovan said.
Democrats on the House oversight committee are pushing to subpoena the Federal Housing Finance Agency to obtain an analysis looking at what effects principal reductions would have on Fannie Mae and Freddie Mac.
FHFA Acting Director Edward DeMarco has long defended the agency’s policy of keeping Fannie and Freddie mortgage servicers from writing down principal. Allowing such an option would only forge more losses for the government-sponsored enterprises who already owe the Treasury Department roughly $151 billion in bailouts, he and both CEOs at Fannie and Freddie concluded.
However, both CEOs are on their way out, and other Democrats in Congress have pushed the White House to replace DeMarco as well.
Mortgage servicers primarily use principal reduction for loans held on portfolio or for private investors. And it has been used sparingly. In the third quarter of 2011, servicers cut principal on 10,722 modifications, roughly 7.8% of all workouts during the period, according to the Office of the Comptroller of the Currency. Roughly 4 million Fannie and Freddie loans are currently underwater, meaning the property is worth less than the loan on the home.
In a November committee hearing, DeMarco said he would provide the lawmakers documents and analysis used for determining the principal reduction policy.
“We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer,” he said at the time.
About one million American homeowners would get writedowns in the size of their mortgages under a proposed deal with banks over shady foreclosure practices, U.S. Housing and Urban Development Secretary Shaun Donovan said Wednesday. The deal, which could be struck within weeks, would mark the largest cut in the mortgage load since the start of the credit crisis.
“We’re very close to a settlement that would both fix the servicing problems, but also help over a million families around the country stay in their homes and get help,” Donovan said at a U.S. Conference of Mayors meeting in Washington.
Donovan’s announcement came the same day that two big regional U.S. banks disclosed they had set aside funds related to mortgage servicing matters, a sign that lenders beyond the five largest mortgage servicers may join the expected settlement.
In exchange for between $20 billion to $25 billion in relief to distressed homeowners, the banks — Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial — will put behind them potential government lawsuits about improper foreclosures and abuses in originating and servicing the loans.
Using Donovan’s estimate, the settlement could provide roughly a $20,000 reduction each for the one million borrowers.
An excerpt fromcnnmoney.com, about respected Laurie Goodman, the current record holder for highest estimate of expected foreclosures across the country:
On top of the 2.5 million homes that have already fallen to foreclosure since the bubble burst, another 4.5 million mortgage holders have given up paying and are likely to lose their homes, she calculates.
Millions more are underwater — owing more than their home is worth — and may give up if things don’t improve soon. All told, Goodman warns that more than 10 million of the nation’s 55 million mortgage holders could default by 2018. If home prices fall much more than the 6% or so she’s projecting over the next 12 to 18 months, the picture worsens, as more foreclosures drive prices down further, in turn causing more sheriffs’ sales.
Goodman’s research into who defaults shows that many governmental and private efforts at saving borrowers — and reducing investors’ losses — by modifying mortgages weren’t helping because they only extended payments or reduced interest rates. They didn’t fix the fundamental problem of unsupportable debt loads.
Goodman found that investors lose as much as 70% when the homes underlying their subprime MBS are foreclosed upon. Lenders that tried to rehabilitate delinquent borrowers by reducing the principal (or total amount owed) by an average of 26% were far less likely to have to foreclose, and they actually provided MBS investors higher returns. “If you save a borrower, you save an investor,” Goodman says.
To avoid the “moral hazard” of rewarding foolish borrowers, Goodman recommends that lenders swap immediate principal reductions for shares of any gains on the mortgaged house when it is sold.
Many mortgage holders, including giants Fannie Mae and Freddie Mac, are refusing any kind of principal-reduction deals, however. Some don’t want to have to take the immediate write-downs that would be required, preferring to delay the financial pain and hope for a rebound.
‘One bailout = endless bailouts’
Many servicers refuse to consider them because their fees are tied to the amount of principal rather than to the ultimate payback to investors. And banks often hold second mortgages for the loans that they service. Principal reductions typically require them to take total losses on those notes.
In short, banks “are ridden with conflicts of interest” that pit them against the interests of borrowers and investors, Goodman says. “Many of the rules in place now are extremely large-bank-friendly, but borrower- and investor-unfriendly.”
Goodman’s firm, of course, is decidedly on the side of the MBS investor in this fight. Nevertheless, ideas she’s been advocating since 2008 are catching on.
The Treasury Department and several state attorneys general are encouraging lenders to offer principal-reduction options. And “shared appreciation mortgage” (SAM) modifications have won support from big thinkers such as Nouriel Roubini, the New York University economist who warned of a housing bubble in 2005. Roubini, who cites Goodman’s work in his own, recently co-wrote a report suggesting that SAMS could help “unclog the real estate and financial arteries and restore healthy circulation.”
At least one private servicer, Atlanta-based Ocwen Financial Corp., has started to try this “share the pain and gain” option. “Progress is slow,” Goodman says, “but I feel like I am getting some traction.”
Does anybody know someone who got a principal reduction? FromHW:
A borrower is more likely to get a principal reduction than a short sale or deed-in-lieu of foreclosure under the Home Affordable Modification Program.
The Home Affordable Foreclosure Alternatives program launched in April 2010 to give borrowers who are eligible for HAMP a chance at a short sale or DIL. Participating servicers completed about 20,700 of these deals as of October, with less than 600 of them deeds-in-lieu, according to Treasury Department data.
The principal reduction alternative, or PRA, began in October 2010 and only for mortgages not guaranteed by Fannie Mae or Freddie Mac. But in six fewer months, servicers started 33,376 modifications by writing down principal.
The effect of the reduction is eye catching. The Treasury released characteristics of HAMP modifications last week. The median loan-to-value ratio on modifications that went through principal reduction was 158%. After the workout was complete, the borrower held an LTV of 115%, meaning he or she owed 15% more on the mortgage than the home was worth rather than being 58% underwater.
The average amount reduced is more than $65,000 or 31% of the unpaid principal balance.
Through PRA, the Treasury pays investors for every dollar of principal forgiven on a sliding scale depending on how far underwater the borrower is.
HAMP enters its final year next month, and it has been criticized at nearly every turn since it launched in March 2009. It will not reach the 3 million to 4 million originally predicted. After redefaults are factored in, roughly 800,000 homeowners will avoid foreclosure thanks to HAMP, according to the Congressional Oversight Panel.
State officials said another reason for the program’s poor performance was that lenders would not go along with a plan to write down mortgage balances.
