Mortgage Law Blog, LLC

Today, the Federal Housing Finance Agency published formal announcement of its establishment in the Federal Register.

The FHFA is an independent Federal agency established July 30, 2008, which will integrate certain functions of the Office of Federal Housing Enterprise Oversight and Federal Housing Finance Board.

Meanwhile, the firestorm of discussions surrounding the Department of Treasury’s conservatorship of Fannie Mae and Freddie Mac continue.  The popular press continues to issue in-depth articles on a variety of details of that conservatorship, and the events leading up to and after the conservatorship.

Mortgage Law Blog notes for readers that various agencies also have issued statements regarding the conservatorship.  Links to a number of these releases appears below.

For a copy of the FHFA announcement, click here.

For FHFA press releases on the conservatorship, click here.

For an FHFA Fact Sheet on the conservatorship, click here.

For a press release from the Department of Treasury, click here.

The following releases are also of interest, in some ways due to their reserved nature:

• Board of Governors of the Federal Reserve System.
• Department of Housing and Urban Development.
• House Committee on Financial Services; also here.
• Senate Committee on Banking, Housing and Urban Affairs; also, here.

Tags: Bailouts, Bankruptcy, FDIC, Fannie Mae/Freddie Mac, Federal Bank Regulators, Federal Reserve, HUD & FHA, Mortgage Banking - General, NCUA, OCC, OTS, U.S. Treasury by the Editor
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Late yesterday, Senate Republicans blocked a test vote on the Foreclosure Prevention Act of 2008 (S. 2636). 

The bill would have allowed judges to change the terms of mortgage loans for borrowers in bankruptcy.  This power threatens to increase costs of mortgage for all borrowers as it undermines lenders’ confidence that loans will be repaid as agreed. 

Democrats fell more than 12 votes short of the needed 60 to get the provision to the floor for a vote.  The Wall Street Journal (paid subscription required) quoted Senator Richard Durbin (D-IL) as saying that the lenders who “created this crisis in America . . . don’t want those people to stay in their homes even if they can make their mortgage payments.” 

This statement seems misguided.  It is widely known that lenders and investors suffer serious damage when borrowers stop paying their mortgages, and bankruptcy filings prolong that process.  In addition, filing bankruptcy harms the borrowers credit for years to come, making any future purchases of homes, automobiles and other items more expensive.

David Kittle, Chairman of the Mortgage Bankers Association, pointed out that the way to keep borrowers in their homes is to pass an FHA Reform bill that will enable borrowers to refinance. 

The President has threatened to veto the measure if it comes across his desk.

Tags: Bankruptcy, Industry Involvement, Legislation, Lobbying, Mortgage Banking - General by the Editor
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On February 13 and 14, Senate Majority Leader Harry Reid (D-NV) read into the record proposed legislation that would give bankruptcy judges the ability to force changes to the terms of mortgage agreements in bankruptcy proceedings.  Senator Reid then placed the bill on the Senate calendar. 

This bill, the Foreclosure Prevention Act of 2008 (S. 2636) includes a variety of provisions, some of which the Mortgage Bankers Association supports.  However, the bill also contains the bankruptcy cramdown provisions widely opposed.  These provisions necessarily are bad for lenders and nearly all consumers.  The provisions also encourage financially negligent behavior and bankruptcy filings, at the cost of financially responsible individuals. 

The MBA has indicated that cramdowns would further destabilize the economy and harm consumers at a time when the credit markets are experiencing serious challenges.   

Boiled down, if a borrower could even get a loan, the loan would have higher interest rates or fees and require larger down payments. 

A prior posting on Mortgage Law Blog has explained that the resulting costs of similar provisions would likely amount to an average of $160/mo. increase in mortgage payments nationwide. 

Additional postings about similar legislation in another pending bill can be found here.

This portion of the legislation should be opposed as bad for business, bad for consumers and bad for the American economy.  It should be strongly opposed.

Tags: Bankruptcy, Consumer Protection, Distressed Assets, Foreclosure, Industry Involvement, Legislation, Mortgage Banking - General by the Editor
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David G. Kittle, Chairman-elect of the Mortgage Bankers Association, testified yesterday in a hearing before the House Judiciary Committee’s Subcommittee on Commercial and Administrative Law. 

The hearing was titled “The Growing Mortgage Foreclosure Crisis:  Identifying Solutions and Dispelling Myths.”  As noted in a prior posting, one of the proposals on the table is to give bankruptcy judges the discretion in a bankruptcy proceeding to change the loan terms of a mortgage loan agreement for a home.  For countless decades, bankruptcy judges have not had this right. 

And for good reason.  Such a “feel good” proposal may allow a judge to give the borrower “lower” payments in a particular transaction.  But this power undermines the lenders’ assessment of the value of the collateral for everyone.  Thus, the whole population will have to pay higher mortgage rates to benefit those individuals who file bankruptcy. 

In addition, giving judges this “cram down” ability actually encourages homeowners in a tight spot to file bankruptcy in hopes of lowering mortgage payments. 

That is simply all around bad policy. 

In Mr. Kittle’s words from yesterday:

It is a myth that allowing cramdowns of mortgages will be a cost-free and easy way to help homeowners.  We expect that HR 3609 will cost your constituents hundreds of dollars a month and thousands of dollars a year.  Passage of this bill will encourage homeowners to file for bankruptcy, an expensive and invasive process.  Instead of encouraging homeowners to seek bankruptcy, Congress should focus on ways to keep people out of bankruptcy and in their home.

If bankruptcy judges are allowed to independently change the terms of a signed mortgage contract, lenders will face new uncertainty as to the value of the collateral - the home.  To account for the new risk, lenders will be forced to require higher down payments, higher costs at closing and higher interest rates, pushing the dream of homeownership beyond the reach of millions of families. . . .

It is a myth that this legislation will actually be positive for the mortgage industry.  This will have an immediate and severe impact on the mortgage market, as companies book the diminished value of their loans and servicing rights.  Rates will certainly have to rise to offset the anticipated losses.  Some companies will not survive the write downs, and the market will go through another period of severe instability. . . .

At a time when the mortgage market is already experiencing a serious credit crunch, this bill threatens to increase costs to consumers, destabilize the mortgage market and result in injury to the overall economy.  We urge Congress to finish work on a stimulus bill, modernize the FHA and pass a predatory lending bill that provides uniform protections for all consumers.  Congress should not change the bankruptcy laws and increase costs on every borrower seeking a new mortgage.

Click here to see the MBA’s full press release.

Tags: Bankruptcy, Consumer Protection, Foreclosure, Legislation, Loan Modifications/Workouts, Loan Servicing, Mortgage Banking - General by the Editor
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Today, the U.S. House of Representatives Committee on the Judiciary, Subcommittee on Commercial and Administrative Law holds a hearing on the “Growing Mortgage Foreclosure Crisis: Identifying Solutions and Dispelling Myths.”

Scheduled to testify are:

• Hon. Jack Kemp
  Former Secretary
  U.S. Department of Housing and Urban Development
• Wade Henderson, Esq.
  President and CEO
  Leadership Conference on Civil Rights
• David G. Kittle, CMB
  Chairman-Elect
  Mortgage Bankers Association
• Mark M. Zandi, Ph.D.
  Chief Economist
  Moody’s Economy.com, Inc.
• Faith Schwartz
  Executive Director
  HOPE NOW Alliance
• John Dodds
  Director
  Philadelphia Unemployment Project

Today’s Wall Street Journal (paid subscription required) carries an op-ed piece entitled A Mortgage Tweak We Don’t Need by Dick Armey.  Mr. Armey, Majority Leader of the U.S. House of Representatives from 1995 to 2001, argues that the proposed cram-down measures will necessarily impose substantial increased costs and other burdens on mortgage borrowers and is bad for consumers.

The Mortgage Bankers Association yesterday issued a press release, in which Mr. Kittle calls a recent report by the Center for Responsible Lending on loan modification and bankruptcy reform misleading.

In the words of the release:

By choosing to misread and misinterpret the existing data on subprime loans, officials at the Center for Responsible Lending have again demonstrated they are more interested in advancing their own legislative agenda than in having an honest debate about the real scope of the problem and how to help those most in need.

According to Moody’s, more than 50 percent of borrowers with subprime ARMs scheduled to reset in the first eight months of 2007 refinanced or otherwise paid off their loans prior to the rate reset. So more than half of those loans that CRL cites as at-risk will never see their rates reset. In fact, the bankruptcy changes CRL advocates for would actually make it harder for consumers to refinance out of their subprime loans because it would increase the cost of all new loans.

And CRL’s stubborn insistence on clinging to ‘loan modification’ as the only means by which a lender can help a borrower in trouble only serves to further mislead policymakers into overreaction. Repayment plans, forbearance and even short sales are all widely accepted ways of helping a consumer avoid foreclosure. And yet CRL ignores them, because including them would better demonstrate the vast efforts lenders make.

Mr. Kittle advises lawmakers to ignore the report as “more rhetoric than fact.”

Tags: Bankruptcy, Consumer Protection, Foreclosure, Industry Involvement, Legislation, Loan Modifications/Workouts, Loan Servicing, Mortgage Banking - General, Subprime Lending by the Editor
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As legislators try to find a political solution to an economic problem - the mortgage market mess - a number of proposed “fixes” have been put on the table already.  One piece of legislation popular with consumer advocates is the Emergency Home Ownership and Mortgage Equity Protection Act of 2007 (H.R. 3609).  This bill was passed by the U.S. House of Representatives’ Committee on the Judiciary last December. 

One reason for its popularity is that it contains a so-called “cram-down” provision.  Boiled down, this provision would give bankruptcy judges the ability to unilaterally change the terms of a mortgage loan, including the amount owed on a loan.  In other words, the judges could cram the losses down the throat of the lenders.  In today’s climate, this “stick it to the man” approach seems to have great appeal. 

In the words of the Mortgage Bankers Association, however, “this Bill throws into question the value of the collateral that backs every mortgage made in this country — the home itself.”  To evidence just how misguided such a knee-jerk reaction is, the MBA crunched some numbers to see what the cost would be to borrowers and consumers in the marketplace if this law were enacted. 

The results?  Consumers nationwide would wind up paying an average of about $160 more per month on their mortgages.   This means consumers would pay approximately $1,920 more per year.  Areas with higher home prices would be hardest hit.  How does an extra $331 per month sound for California? or $an extra $231 per month in Massachussetts?

In my own beloved Washington, DC, Maryland and Virginia, we would get to pay an extra $238 or so per month. 

The reason is simple.  It doesn’t take a PhD in economics to figure out.  If the lender can’t count on the value of the collateral when it makes a mortgage loan, the lender has to price that loan higher.  Thus, the cost to borrowers increases.

Ultimately, what happens is the people who pay their bills get hit with higher rates because some small portion of the population doesn’t pay its bills.  Is this a sound pro-consumer approach?  So why do certain consumer advocate groups like the Center for Responsible Lending try to “help” in this way?  This is the last thing borrowers and homeowners need. 

How is someone supposed to buy or sell a house if no one can afford a mortgage?!!

Tags: Bankruptcy, Consumer Protection by the Editor
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