Homeowner Affordability and Stability Plan
Well, here we go again with another round of legislation designed to help combat the foreclosure crises in America and put our economy back on track. Our office has already been getting a decent volume of inquiries from clients with questions on just how this Homeowner Affordability and Stability Plan will help them. To be perfectly honest, we are not really sure at this point. However, we will be attending various legal forums in Washington, DC to better understand this newest initiative designed to help troubled homeowners and will be sharing this information with you sometime after March 4 when the new Homeowner Affordability and Stability Plan is actually implemented.
But, what we do know is that there is already a similar piece of legislation that has already been enacted that was also designed to help homeowners avoid the terrible effects of foreclosure. Perhaps we should take a moment to review what’s already out there.
On Friday, October 3rd, 2008, President Bush signed into law the economic bailout bill which is geared toward healing America’s very distressed financial condition. This bill will help to insure American’s retirement funds (such as 401k’s and pension funds) remain intact and by re-assuring the savings and loan industry by insuring depositor’s assets up to $250,000.00 per account.
But what does the Bailout really mean for homeowners and their mortgages? The plan called for the Treasury to work with their own loan servicers to stem the tide of foreclosures. But, whether or not this legislation is helping remains very unclear as (once again) the government cannot seem to grasp the term “accountability”. The bill was designed to help struggling homeowners refinance into more affordable mortgages. Under the current bill, federal agencies (such as Fannie Mae & Freddie Mac) holding mortgages and mortgage securities were required to identify loans that could be modified without causing big losses for taxpayers.
Exactly how the modifications would be done wasn’t totally clear. Generally, when considering whether to modify a loan, servicers determine whether the borrower has the means to make payments on their loan, if the loan terms were changed slightly. At the same time, the servicer considers whether it would cost less for them to modify the loan instead of foreclose. Often when a borrower is up-to-date on payments, but faces a big spike in rates, the modification may call for freezing interest rates at the introductory level. The workout could also reduce the principal balance or stretch out the term of the loan, from 30 years to 40 years, for example.
For all the rest of American homeowners who do not have a government backed mortgage, the bill called for encouraging loan servicers to refinance their loans through the Hope for Homeownership program, which began on October 1st, 2008. This is an initiative for lenders who have borrowers in default (and who can't meet their current mortgage terms) to refinance into a more affordable, fixed-rate loan. It also requires the homeowner’s current lender to re-write their loan based on the home’s current fair market value.
The lender must be willing to voluntarily write off the difference and forgive the homeowner for any deficiency on the loan. If they lender agrees to participate, the Federal Housing Administration will automatically guarantee the loan and the lender will be able to retain the note/mortgage as well as their customer. The exact same holds true under the new Homeowner Affordability and Stability Plan. The lender must be willing to voluntarily write off the difference and forgive the homeowner for any deficiency on the loan.
Private lenders have been under a lot of pressure to modify non-government backed loans since the mortgage meltdown began over two years ago. However, the biggest roadblock to changing loan terms are the investors who hold the securities created from those mortgages. This continues to be the case. We believe this will also be the case with the new Homeowner Affordability and Stability Plan introduced by this current administration. Investors will still need to be willing to voluntarily modify their loans.
However, when it comes to government backed mortgages that are insured through Fannie Mae or Freddie Mac, it was suppose to be a different story. As the owner of a large number of government backed mortgage securities, the federal government currently has the power to modify more of their own troubled loans. In addition, the government may now also buy other non-government backed mortgage loans themselves directly from lenders, if the investor wishes to sell their defaulted mortgage notes to the government. The government would then try to avoid preventable foreclosures in a way that makes the most sense for taxpayers. The bill also called for setting up an insurance program - to be funded with risk-based premiums paid by the industry - to guarantee companies' troubled assets (including mortgage-backed securities) purchased before March 14, 2008.
The bill allowed the Treasury access to the $700 billion in stages, with $250 billion being made available immediately. This initial release of funding was to be used to stabilize America’s retirement funds such as 401k’s & pension funds. Then the focus was to be on stabilizing the savings & loan industry by making sure depositors funds are insured and stabilized. The remaining focus was to be geared toward troubled mortgages by allowing the government to buy defaulted mortgages from lenders, which would allow mortgages to be modified by a number of means - including reducing the principal and/or interest rate. But, once again, politics as usual had to interfere with the true intent of this legislation by diverting funds toward other areas that were not earmarked for these funds.
The bill also extended a temporary revision in the tax code that exempts homeowners from having to pay federal income tax on any debt forgiven by a bank to a borrower in a foreclosure or a short-sale on a principle primary residence as long as the homeowner occupied the home during the last 2 out of 5 years. This temporary revision has been extended through 2010. We truly believe the same issues that have plagued the Economic Bailout legislation enacted by the Bush administration will also plague the Obama administration’s Homeowner Affordability and Stability Plan.
It is our belief that lenders and investors will continue refuse to re-write these loans. Homeowners should keep their expectations limited since lenders and investors continue to be very reluctant to take the government up on their offer that has been extended to them since October 3rd, 2008. Since then less than 5% of defaulted mortgages have been successfully modified in any form. There has been a HUGE resistance by the mortgage lending industry to help homeowners in distress.
Continued public and political pressure may prompt them to participate. If not, the current White House administration will try and subject them to additional regulations and/or investigations if they remain unwilling to take on the risks while more homeowners continue to fall victim to the foreclosure crisis.
Because less than 5% of all defaulted mortgages of been successfully modified since these assistance initiatives were put in place by President Bush, congress has introduced new legislation to force lenders/investors to modify defaulted mortgage loans. The newly introduced "Cramdown" legislation (a.k.a. Mortgage Modification Bill) is currently being debated and is expected to pass (in some form) within the next coming months. This legislation would give bankruptcy judges the unrestricted full capacity authority to modify or restructure a homeowner's mortgage(s) held on their principle primary residence. We can expect a HUGE battle between the mortgage industry and our law makers. We need to continue the fight to correct the devastation left behind by predatory lenders and unscrupulous mortgage executives. It is now our even greater responsibility to make certain it never happens again.
Executives of financial institutions have amassed huge fortunes on the backs of hardworking American families. While living in their many luxurious homes and enjoying the most lavish of lifestyles, they have refused to restructure mortgages that would allow families to stay in their homes.
The Neighborhood Assistance Corporation of America ("NACA") is a non-profit, community advocacy and homeownership organization. NACA’s primary goal is to build strong, healthy neighborhoods in urban and rural areas nationwide through affordable homeownership. NACA has revolutionized mortgage lending with its mortgage services and advocacy. NACA continues their aggressive advocacy against predatory lenders and the fight for economic justice. NACA is a high-profile organization, with its program and advocacy featured in the national media, including the Wall Street Journal, Prime Time Live, Boston Globe, Washington Post, major news outlets, and local networks nationwide. If you are a homeowner facing foreclosure and are in need of assistance, we encourage you to contact a NACA representative today! You can find them on the web at www.NACA.com. Homeowners who are struggling to make their monthly mortgage payments or are behind in their mortgage payments or are currently facing a foreclosure should not be thinking the new Homeowner Affordability and Stability Plan will automatically help them. Homeowners should not be waiting for Uncle Sam to tap them on the shoulder to offer them the assistance they need. That day may never come for many troubled homeowners.
Homeowners who have a government backed mortgage which is insured through Fannie Mae or Freddie Mac should be hopeful. However, all others should be very concerned. Just who will get that tap on the shoulder remains am enormous question. It will take lenders and the government several weeks (if not several months) to navigate through these very murky waters. Homeowners need to understand that just because they may be behind in their mortgage payments or are currently facing a foreclosure, does not mean their lender will automatically sell their note to Uncle Sam. Keep in mind, this bill is not a mandate for private lenders. It requires a voluntary participation from the various private mortgage companies across America. Some investors may choose not to sell their defaulted mortgages to the government for their own reasons. Others may choose to sell off their defaulted notes in part. Meaning, for those homeowners who obtained 80/20 financing (1st & 2nd mortgages) held by the same lender, the lender may choose to only sell off their second mortgage to the government and retain the first mortgage themselves. Troubled homeowners are encouraged to contact their lenders to see if they intend on selling off their note(s) to the government.
Homeowners who are potentially facing a foreclosure should not be sitting idle under their current circumstances thinking they will be “rescued”. Rather, homeowners should be taking corrective actions now by contacting their current lenders to see what options may be available to them such as a loan modification (if the homeowner wishes to keep their home) or by facilitating a legally negotiated short-sale (for homeowners who need to sell, but owe far more than their property is currently worth). The goal for homeowners should ultimately be to avoid a foreclosure at all costs. Our fear is that homeowners will be wasting time waiting around for Uncle Sam to extend his helping hand. Unfortunately, the reality of if and when this might happen may never come or may simply come to late for those homeowners currently facing foreclosure.
PLEASE NOTE: It is important to understand that NACA and other agencies are extremely dedicated national non-profit advocacy groups striving to help as many homeowners across the country as they can. However, as with any organization, they have a limited number of staff and resources available to handle every homeowner’s case. Therefore, homeowners may have much more of a benefit and advantage by retaining private qualified independent legal counsel to represent themselves directly in foreclosure proceedings and foreclosure prevention measures.
All the Best,
James M. Bosco, Esquire
Rick D. Misitano, Senior Paralegal
Law Offices of James M. Bosco
Methuen Executive Park
240 Pleasant Street
Methuen, Massachusetts 01844
978-687-8804 Office
978-687-8872 Fax
boscolaw@comcast.net
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