The Comptroller of the Currency, John C. Dugan, and Governor Randall S. Krozner of the Board of Governors of the Federal Reserve, among others, today testified before the House Committee on Financial Services regarding the ”Federal Housing Administration Housing Stabilization and Homeownership Retention Act of 2008.”
The bill was announced by Chairman of the House Committee on March 13.
According to an OCC press release, the Comptroller told the Committee that the proposal “could provide another possible tool for helping banks avoid larger losses from foreclosure without raising significant safety and soundness issues.”
Boiled down, the press release noted, the voluntary proposal has three elements. “First, if the borrower and mortgage holder agreed and the borrower met certain criteria, the mortgage holder would reduce the principal to an amount that the borrower could afford. Second, the mortgage holder would accept a corresponding loss. Third, the mortgage would be refinanced into a new FHA-insured mortgage product at the lower amount.”
The Comptroller noted that the voluntary nature of the program should keep safety and soundness considerations should be manageable.
Governor Krozner’s testimony provided insight to the Fed’s view on the complicated housing picture and the difficulties underlying some of the proposed solutions. Mr. Krozner summed up by saying:
FHA modernization and GSE reform are needed to address the ongoing shortcomings of current mortgage-oriented government initiatives. In addition, the GSEs should be strongly encouraged to raise additional capital so that they can fulfill the expanded role that the Congress has recently extended to them.
Separately, the Congress should carefully evaluate whether to take additional actions to reduce the rate of preventable foreclosures. Properly designed, such steps could promote economic stability for households, neighborhoods, and the nation as a whole. Although lenders and servicers have scaled up their efforts and have adopted a wider variety of loss-mitigation techniques, more can, and should, be done.
The fact that many troubled borrowers have properties that are now worth less than the principal amounts remaining on their mortgages suggests that lenders and servicers should give greater consideration to the use of principal reductions as one of the loan modification options in their tool kit. Principal write-downs would be facilitated by providing the FHA the flexibility to insure a broad range of refinancing products for a larger number of at-risk borrowers, including products that offer borrowers an affordable, restructured mortgage if their lender voluntarily agrees to write-down the principal amount of the borrower’s mortgage. The voluntary nature of the program assures that only borrowers who the servicer or lender believes cannot successfully carry their current mortgage contract would be considered for such a program. If the Congress decides to move down this road, it should carefully consider the steps that should be taken to mitigate moral hazard, avoid adverse selection, and ensure that the financial interests of the taxpayer are adequately safeguarded.
For the House Committee’s press release summarizing the proposal, click here.
For a copy of the discussion draft of the bill proposed by the House Committee, click here.
Click here for a copy of the OCC’s press release regarding the Comptroller’s testimony.
Click here for a copy of Governor Krozner’s prepared remarks.
Tags: Bailouts, Consumer Protection, Fannie Mae/Freddie Mac, Federal Bank Regulators, Federal Reserve, Foreclosure, HUD & FHA, Legislation, Loan Modifications/Workouts, Loan Servicing, Loss Mitigation, Mortgage Banking - General by the Editor
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