Monday, February 23, 2009

What Bankruptcy Attorneys Need to Know About Obama's "Homeowner Affordability and Stability Plan" (Other Than the Mortgage Cramdown)

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

All eyes of the bankruptcy world are fixated on a single portion of President Obama's "Homeowner Affordability and Stability Plan" he presented last week, the Chapter 13 mortgage cramdown. But he talked about that for just one three-sentence paragraph towards the end of his 42-paragraph speech, and it takes up just one sentence of the dense 3-page White House "Executive Summary" of the Plan. Every bankruptcy attorney, especially but not just those representing debtors, needs today to understand what is in the mortgage cramdown legislation, and to monitor its progress. But both creditor and debtor attorneys also need to know what else the new administration is doing on the home foreclosure front. The initiatives announced last week will have direct consequences throughout the consumer debtor-creditor world.

This Bulletin briefly summarizes the "Homeowner Affordability and Stability Plan" as pertinent to debtor-creditor attorneys, and gives quick access to resources related to it.

Note that the Administration is preparing detailed guidelines to be released on March 4, and various component of the Plan are to go into effect that day.

The Homeowner Affordability and Stability Plan:
Has 3 components (the quoted titles are from the Administration's Fact Sheet):

1. "Provide Access to Low-Cost Refinancing for Responsible Homeowners Suffering From Falling Home Prices"
New refinancing program for homeowners:
  • with conforming Fannie Mae and Freddie Mac mortgages
  • who are now current on their payments
  • who can't refinance because of debt-to-equity rules
Loosening these debt-to-equity rules will enable refinancing at lower, fixed interest rates "for an estimated 4 to 5 million currently ineligible homeowners."
2. "A $75 Billion Homeowner Stability Initiative to Prevent Foreclosures and Help Responsible Families Stay in Their Homes"
A loan modification program for homeowners.
  • who are either underwater or have high mortgage debt compared to income
  • who are either not current or at risk of default
"Shared Effort to Reduce Monthly Payments."
  • Lender reduces interest rates so the monthly payment is no more than 38% of income
  • Principal reductions at option of lender with government partially sharing in these costs
  • Government will share costs with the lender to bring interest rate down to 31%
  • Servicers receive $1,000 for each qualifying modification, plus month fees as long as borrower stays current, up to 3 years
  • Additional incentive payments to mortgage holders and to servicers if modification occurs while at-risk homeowner is still current
  • $10 billion partial guarantee for lenders to encourage modification in face of potential further price declines
  • Modification lasts 5 years to promote long-term affordability, then interest gradually increases back to pre-modification rate
3. "Support Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac"
Increase funding commitment to Fannie and Freddie to strengthen mortgage markets and affordability.

Continued purchase of Fannie and Freddie mortgage-backed securities by Treasury Department to aid stability and liquidity

Increase allowed mortgage portfolios by $50 billion to $900 billion.

Resources for Attorneys (AND for Clients, especially the ones marked with " ** ")

1. The briefest outline of the "Homeowner Affordability and Stability Plan," the 3-page Executive Summary referred to above.

2. A more detailed outline, fleshing out the above one, the 8-page Fact Sheet, also mentioned above.

3. **A practical 5-page Questions and Answers for Borrowers about the Homeowner Affordability and Stability Plan, with a section for "Borrowers Who Are Current on Their Mortgage Are Asking," and for "Borrowers Who Are at Risk of Foreclosure Are Asking."

4. **A financial description of three hypothetical homeowners and how they could be helped under the Plan: "Support Under the Homeowner Affordability and Stability Plan: Three Cases"

5. A cautiously optimistic Forbes article called Fixing Foreclosures: Carrots, Sticks And Questions, with the byline: "Obama's plan is likely to be the most effective to date, but many details are still unknown." Contains an interesting suggestion by a former HUD General Counsel under President Clinton, Howard Glaser, that the voluntary mortgage modifications ought to contain a provision that if modified they will be immune from Chapter 13 cramdowns, even if the modification is not successful. "You say that, and investors will be running--stampeding--to modify as many loans as they can."

6. A foreclosure defense litigator's insightful blog titled "The proposed bankruptcy amendment will even help those who don't want to file" shows how the non-bankruptcy modification arena would change drastically once the Chapter 13 cramdown law passes and the lenders' entire motivation structure changes with it.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys