Wednesday, November 12, 2008

New Streamlined Home Mortgage Modification Program: Making Sense of Yet Another Federal Effort to Rescue Homeowners

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

On November 11, 2008 the federal government announced another major home mortgage modification program. It is being presented by the Federal Housing Finance Agency (FHFA), which was established by the Housing and Economic Recovery Act of 2008 signed into law on July 30, 2008, the same agency which took control of Fannie Mae and Freddie Mac in September by authority of that Act. This Bulletin focuses on the bankruptcy aspects of this story, plus outlines the program's main components, and concludes with some of the key perceived shortcomings of the new program as highlighted by some of the immediate criticism that greeted it the very day it was presented.

The Bankruptcy Aspects

Most important for bankruptcy practitioners, this program is NOT available to homeowners in bankruptcy. According to the "Questions and Answers on the Streamlined Modification Program" attached to FHFA's news release about it, an eligible homeowner is one who "has not filed bankruptcy." This is in contrast to the Hope for Homeowners program of the federal Department of Housing and Urban Development (HUD), which IS available to debtors in bankruptcy, according to Oregon Chapter 13 trustee Brian Lynch, who is Chair of the Loss Mitigation Subcommittee of the Mortgage Liaison Committee of NACTT (National Assn. of Chapter Thirteen Trustees).

(Please see my two earlier Bulletins, on the Housing and Economic Recovery Act of 2008 entitled
The Impact of the New Major New Federal Housing Law on Your Bankruptcy Practice, and on The Hope for Homeowners Program Launched on Oct. 1, 2008: What Do I Need to Know About It?)

What is
the effect of this and various other mortgage modification programs--governmental as well as a recent series of them by major mortgage holders--on the prospects for the oft-proposed Chapter 13 mortgage modification amendment? I have been monitoring the blogosphere of bankruptcy attorneys and law professors and have not recently seen any noteworthy analysis about this. The facts on the ground seem to be moving too fast to allow for time for analysis. But with the Presidential election now decided, everybody is will be trying to discern what steps the Obama administration will take on bankruptcy legislation and other ways of dealing with the mortgage crisis, as the ground continues to move quickly beneath us.

The FHFA's "Streamlined Modification Program"

For a brief outline of the new program, click here for statements on November 11 by FHFA head James Lockhart and by Treasury Interim Assistant Secretary for Financial Stability Neel Kashkari.

Eligibility: Owner-occupied as primary residence, three or more missed payments, "has not filed bankruptcy," with "a Freddie Mac, Fannie Mae or portfolio loan with participating investors. . . . must certify that he or she experienced a hardship or change in financial circumstances, and did not purposely default to obtain a modification."

"Streamlined"?: This program requires less documentation and processing, largely by using a "benchmark ratio of housing payment to monthly gross household income" of 38%. "This is the first time the industry has agreed on an industry standard. . . . Once the affordable payment is determined, there are several steps the servicer can take to create that payment – extending the term, reducing the interest rate, and forbearing interest. In the event that the affordable payment is still beyond the borrower’s means, the borrower’s situation will be reviewed on a case-by-case basis using a cash flow budget."

The Procedure: A "seriously delinquent borrower should contact his or her servicer and provide the requested information – monthly gross household income, association dues and fees, and a hardship statement." "Upon receiving the Modification Agreement from the servicer, the borrower signs it and returns it with the 1st payment at the modified terms along with income verification. Once the borrower makes three payments at the modified terms and the account is current as of day 90 of the modified plan, the modification is complete."

Effective Date: December 15, 2008.

Limitations on and Criticism of the New FHFA Program

Even though FHFA's Director James Lockhart made a point of stating that "we have drawn on the FDIC’s experience and assistance, and have greatly benefited from the FDIC’s input," and indeed the new program is largely based on a similarly streamlined one formulated by FDIC for IndyMac mortgages after its takeover of that lender, nevertheless the FDIC's outspoken chairman Sheila Bair used the occasion to both applaud the step and continue her argument that some of the recently approved bailout funds be used to deal directly with the foreclosure problem.

U.S. Senator Charles Schumer also released a statement on the same day as the new FHFA program was announced complaining that this program will work only where "Fannie and Freddie hold the whole loan, which is true in too few cases" . . . . “When the loan is chopped up into a million pieces . . . any investor can block a modification from happening.” Instead Schumer again argued for loan modification through bankruptcy code amendment as the best solution to get at this otherwise intractable problem. Depending on how the ground continues to move beneath us, the larger majorities of Democrats in both Houses of Congress two months from now may be able to overcome the heretofore strong Republican and banking industry opposition to this bankruptcy component.

FHFA's Lockhart anticipated this concern about this program only dealing with mortgages owned or guaranteed by Fannie Mae and Freddie Mac, and effectively pleaded with other mortgage holders to use this program as a model for their own efforts:
Although these [Fannie and Freddie] mortgages only represent 20% of serious delinquencies, I believe their leadership role combined with the many partners of HOPE NOW should spread this approach throughout the whole mortgage loan servicing business. The performance of private label mortgage backed securities that were sliced and diced and sold to investors is just the opposite of Fannie Mae’s and Freddie Mac’s. Private label securities represent less than 20% of the mortgages but 60% of the serious delinquencies. As the regulator of the housing GSEs that own over a quarter of a trillion dollars of private label securities, I ask the private label MBS servicers and investors to rapidly adopt this program as the industry standard. Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values.

Query: Does the bankruptcy disqualification apply only to homeowners in pending bankruptcy cases or also to those who have recently completed a Chapter 7 or 13 case? And if a homeowner qualifies for and signs the Modification Agreement, can she file a bankruptcy case after the three months of new payments "completes" the modification? We should have more guidance about such critical details in early December when the implementing regulations are completed.

by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
©2008 Bankruptcy Litigation Support for Attorneys