Are We There Yet?

Are we there yet? Children ask that question endlessly on a long car trip. Federal Reserve officials are asking it about their drive to curb inflation.

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The Department of Housing and Urban Development (HUD) has published details of the new “HOPE for Homeowners” program enacted by Congress several months (and a couple of massive financial industry bail-outs) ago. The program authorizes the Federal Housing Administration (FHA) to refinance up to $300 billion in under-water mortgages held by borrowers at risk of losing their homes through foreclosure.

Under the guidelines approved by HUD, the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation, assistance will be available to borrowers with mortgages originated on or before January 1 of this year, secured by a primary residence. Eligible borrowers must:

  • Have made at least six payments on the loan.
  • Have mortgage payments representing more than 31 percent of their gross monthly income.
  • Demonstrate that they are not able to make the payments on their existing loan without help.
  • Certify that “they have not been convicted of fraud in the past 10 years, have not intentionally defaulted on debts, and did not knowingly or willingly provide material false information” to obtain their loan.
  • The maximum loan available under the program will be $550,440 and cannot exceed 90 percent of the property’s current appraised values. Participating lenders must reduce the outstanding principal balance to achieve that 90 percent limit and must accept the proceeds of the HOPE loan as full settlement of the outstanding loan. Additionally, all lien holders must waive prepayment penalties and late payment fees. And subordinate lenders must agree to release their outstanding liens.

A major obstacle impeding large-scale loan modifications to date has been the reluctance of lenders to accept the haircut this program requires. A recent report by a group of state attorneys general and bank regulators found that loan modifications have declined by nearly 30 percent since February of this year (see related news item). But HUD Secretary Stephen Preston has said that lenders have become more willing to write down loans in order to stem their mounting foreclosure losses.

The recently approved $700 financial billion bail-out, targeting the banking industry, includes some provisions designed to make mortgage write-downs under the FHA program more palatable. One allows banks to buy out secured lien holders; another gives HUD the flexibility to reduce the required write-down below 10 percent in some cases.

Lenders have generally welcomed those changes but have expressed concern about another provision in the HOPE guidelines, requiring borrowers with loan ratios above the program limits (31 percent for loan-to-income and 43 percent for debt-to-income) to complete a three-month trial period demonstrating their ability to make payments on the refinanced loan before the FHA will commit to insuring it. This “show me” requirement, as some analysts have dubbed it, requires a level of cooperation between lenders and loan servicers that industry executives say may be difficult to achieve.

“There’s a ‘he said, she said’ potential from the borrower’s standpoint,” Rod Dubinsky, head of the asset-backed securities research division for Credit Suisse, told American Banker. “The trial period, he said, “requires the servicers and FHA lenders to work hand in glove.”

Preston has emphasized that HOPE remains a work in progress, subject to further revisions based on experience and industry feedback, a point FHA Commissioner Brian Montgomery echoed in a recent interview with AB. “We’re kind of flying the plane and fixing it at the same time,” he said, adding, “Our work doesn’t end today. A good bit of it does, but this product is out there for the next three years, so as we go forward, we’ll adjust as we need to.” 


Congress is ratcheting up the pressure on mortgage lenders to restructure the loans of delinquent borrowers rather than foreclosing on their homes. In a letter to the heads of some of the nation’s largest lenders, including Citigroup, JPMorgan Chase & CO., and Well Fargo, among others, Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, said efforts to help borrowers to date have been disappointing, despite repeated requests from legislators for lenders to move more aggressively to forestall foreclosures. “Our warnings and urgent appeals have not been sufficiently heeded, thus deepening the effects of the financial crisis on homeowner, communities, and the economy as a whole,” Frank said in his October 8 letter. He cited the recent announcement of Bank of America’s plan to undertake “mass modifications” of loans the bank inherited when it acquired mortgage lending giant Countrywide Financial earlier this year. The $8.7 billion plan will provide direct relief to borrowers through “substantial interest rate reductions, reductions in principal and waivers of late fees or prepayment penalties,” Frank said in his letter, directing lenders to report back to his committee by next week, detailing their own plans for helping struggling borrowers.

Frank is not alone in pointing to the bank of America plan as a borrower assistance model others should follow. The State Foreclosure Prevention Working Group, a coalition including the Conference of State Bank Supervisors and attorneys general in 11 states, also cited the plan in a recent letter to 16 major servicers of subprime loans, urging them to move quickly to undertake wholesale loan modifications. “It has become clear that the scope and scale of this foreclosure crisis demands a more efficient response than handling individual borrower cases one at a time,” the October 7 letter says.

The letter cites the results of the Working Group’s most recent report, which found that the pace of modification efforts has slowed dramatically in recent months. While the number of modifications completed increased by more than 50 percent between January and May of this year, the number of modifications in process declined by 28 percent, the report says. Equally disturbing, it notes, an increasing proportion of the work-outs consisted of short sales of properties rather than the restructuring of owners’ loans.

The “precipitous” decline in modifications has come as delinquency rates and foreclosures continue to rise, according to the report, which notes, “Too many homeowners face foreclosure without receiving any meaningful assistance by their mortgage servicer….The mortgage industry’s failure to develop systematic approaches to prevent foreclosures,” the report concludes, “has only spurred declines in property values and further increased expected losses on mortgage portfolios.”

The report’s findings underscore the need for immediate and more aggressive measures to assist borrower, the Working Group says in its letter, which blames “the flood of foreclosures” for declining home prices and ‘the severe liquidity crisis currently gripping the nation. The letter urges loan servicers “in the strongest possible terms” to develop and implement a “comprehensive, streamlined, and effective loan modification program as soon as possible.” 


Lenders that pushed successfully for reform of the bankruptcy law may have cause to regret their success. The reform legislation, enacted in 2005, is working as intended, to make it more difficult for consumers to erase their debts through a Chapter 7 bankruptcy filing. But some critics say the changes are also having the unintended effect of forcing more financially ailing homeowners to walk away from homes they could have shielded more easily under the old bankruptcy rules.

Several recent reports have reached that conclusion. One, by David Bernstein, a Treasury Department analyst, found that despite the worsening financial climate, bankruptcy filings by homeowners have declined by more than 800,000 since the new rules took effect. Because of that trend, Bernstein estimates that bank foreclosure filings are 4 percent higher than they would have been otherwise. A separate report by Credit Suisse reaches the same conclusion. “The [bankruptcy] rules are directly responsible for the rising foreclosure rate,” that study contends.

The problem, these analysts and others say, is that consumers who filed under the old Chapter 7 rules could have eliminated their debts but retained their homes. Consumers are now forced by the stricter rules to accept Chapter 13 repayment plans, many of which fail, leaving banks free to pursue foreclosure actions.

Philip Corwin, counsel to the American Bankers Association (ABA), which led the battle for bankruptcy reform, rejects that theory. The studies linking bankruptcy reform to rising foreclosures “don’t stand up to scrutiny,” he told Business Week.

Still, criticism of the bankruptcy reforms has begun to intensify as the housing market has sagged and the economy has weakened. Congress has thus far rejected legislation that would give bankruptcy judges the authority to alter the terms of residential mortgages – most recently stripping that provision from the $700 billion financial industry bail-out bill for fear that opposition to it would sink the entire package. Sponsors of the provision have said they will introduce it again as a stand-alone measure.

The courts, meanwhile, have also been looking at various provisions of the bankruptcy reforms, and one recent decision will not be welcomed by reform advocates. The U.S. Court of Appeals for the Eight Circuit rejected as an infringement on free speech a provision in the law barring attorneys from advising clients considering bankruptcy to incur more debt before filing. In a 2-1 decision, the court said that restriction “prevents attorneys from fulfilling their duty to clients to give them appropriate and beneficial advice. There are certain situations where it would likely be in the assisted person’s and even the creditors’ best interest for the assisted person to incur additional debt in contemplation of bankruptcy,” the court said, citing as an example a situation in which refinancing a mortgage to lower home payments could free up cash that could be used to repay other debts.

A Minnesota law firm, Milavetz, Gallop & Milavetz, challenged the ‘free speech’ provision in the bankruptcy law shortly after it took effect three years ago. Justice Department officials told reporters they are reviewing the decision, which applies only in North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Missouri and Arkansas, but is expected to seek traction in other jurisdictions. 


If you’ve been suffering whiplash from watching the stock market of late, you may have overlooked some relatively good news on the housing front. The emphasis is on “relatively,” but relatively good news is better than none at all. The National Association of Realtors (NAR) reports that its index of pending home sales actually increased in August to 93.4 from an upwardly revised 87.0 in July. That puts the index 8.8 percent above the year-ago reading and at its highest level since June 2007.

NAR analysts attributed the improvement to buyers finally responding to lower home prices, especially in hard-hid markets (California, Nevada, Arizona, Florida and Rhode Island) where foreclosures continue to rise, and to a mild easing in lending constraints following the government takeover of Fannie Mae and Freddie Mac. On the other hand, the index also reflects activity before the credit markets essentially froze in September, triggering the massive government bail-out legislation approved earlier this month. “It’s not clear how contract activity may be impacted by the credit disruptions on Wall Street,” Lawrence Yun, chief economist for the NAR, acknowledged. “But we’re hopeful most of the increase will translate into closed existing-home sales.”

With most analysts now conceding that a recession has begun (and some predicting that it will be steep and prolonged), the NAR is projecting existing home sales in the 5.04 million range this year, increasing to around 5.4 million in 2009, with average prices declining by 5 percent to 8 percent this year and then rebounding slightly, for a 2 percent to 3 percent gain next year.


Baby boomers have produced a bulge at every developmental phase throughout their life cycle – in elementary schools, in colleges, in the housing market and in educational toys (for boomers’ babies). As the boomers approach and reach retirement age, they are creating another bulge – this one in the demand for age-restricted housing. The National Association of Home Builders estimates that nearly 10 percent of the 1.4 million housing units built this year were in developments open only to residents 55 and older, and the demand for these projects will continue to grow for several years to come, the NAHB predicts, as developers accommodate the needs of boomers who prefer to remain in the communities in which they have lived and raised their children.

A significant and growing number of these age-restricted developments are being structured as condominiums, but with an array of services that aren’t common in mixed-age condominium communities. These services, which make some developments resemble assisted living communities, include meals, housekeeping, and transportation, plus a full menu of organized social activities, all of which are reflected in the cost. Monthly fees can range from $500 to $4,000 or more in the most up-scale of these developments.

As an indicator of the growth developers anticipate in this area, Sunrise Senior Living, Inc., one of the nation’s largest builders of assisted living facilities, has several projects under construction and at least 10 more in the development pipeline, according to a report in National Real Estate Investment. But the concept of “service-enriched” condominiums is still relatively new and not necessarily appropriate for all communities, according to analysts, who say significant growth will require educating consumers about the advantages. “The jury is still out,” Derrick Dagan, a research analyst at Avondale Partners LLC, told NREI. At this point, he said, “it’s something developers are still trying out.”