WASHINGTON -- On the heels of the White House-blessed and Treasury-approved bailout of Bear Stearns, Representative Barney Frank (D-Mass.) offered his mortgage rescue legislation to Congress.
His plan calls for a federal program to provide insurance for up to $300 billion in refinanced mortgages. Republicans have waved flags about making credit too tight in an already tightening market by over regulating lenders (a corollary to helping both bankers and borrowers is increased oversight), but as foreclosures deepen the plan may pick up speed. Frank signaled that Treasury officials had responded positively, seeking talks with the House Financial Services Committee chairman.
Little resulted from Federal Reserve Chairman Ben Bernanke's recent appeal to community bankers suggesting they write down a portion of the principal owed on delinquent loans to stem rising foreclosures because lenders are reluctant to do so. But Frank's legislation may offer the guarantee they need. He says it will help stabilize the housing market. Until the Bear Sterns bailout both the Treasury and the White House were on record opposed to any direct governmental assistance to homeowners, preferring lenders to do workouts.
The bill is titled the FHA Housing Stabilization & Homeownership Retention Act and was introduced on March 14. It would allow the Federal Housing Administration to insure and guarantee refinanced mortgages that have been written down by mortgage holders and lenders. The FHA would provide up to $300 billion in new guarantees to refinance at-risk borrowers into viable mortgages they can reasonably expect to pay. In exchange for a substantial writedown of principal, lenders receive a short payment from the proceeds of a new FHA loan. Frank estimates that this option could potentially refinance between one to two million loans.
CUNA CEO Dan Mica wrote a letter of support for Frank's proposed legislation, pointing out that "credit unions have not made the types of mortgages that provided the impetus of the current economic downturn" but noting how they are willing and able to help, especially since they have such high capital ratios. More CUs would likely become FHA lenders should the legislation pass, he said, despite the burden of greater regulation.
Mica hinted broadly that if CUs had a risk-based capital system as opposed to the static requirements under the FCU Act of 1934--like those provided for in CURIA (H.R. 1537)-- it would "free additional capital to help borrowers refinance mortgages they received from other lenders."
Under Frank's plan, a borrower or existing loan servicer of an eligible loan would contact an FHA-approved lender, who would determine the size of a loan that would be consistent with the requirements of the program. If the lender agrees to a writedown that is sufficient, the FHA-lender will pay off the discounted existing mortgage.
In addition to a first lien, the program gives the government a soft second lien to help defer the government's costs and prevent unjust enrichment by borrowers who are flipping houses. When the borrower sells the home or refinances the loan, the borrower will pay from any profits the higher of an ongoing exit fee equal to 3% of the original FHA loan balance or a declining percentage of any profits.
Residences must be owner-occupied, principal residences, and the existing senior loan being refinanced must have been originated between January 2005 and July 2007. To allay the moral hazard of giving homeowners an incentive to default, a mortgage debt-to-income ratio of no less that 40% as of March 2008 is required, and the borrower must certify that he or she has not intentionally defaulted on any existing mortgage.
Participating mortgage holders and investors must waive any penalties or fees on the existing mortgage and must accept proceeds of the new loan as payment in full.
Existing mortgage holders and investors must accept their losses--taking a substantial writedown sufficient to establishing a 5% loan-loss reserve for the FHA and bring the loan-to-value ratio on the new FHA loan down to no greater than 90% of a property's current appraised value. It must result in a meaningful reduction in mortgage debt service to the borrower, and the borrower pays all upfront fees for the new loan. Accordingly, to qualify mortgage holders would need to accept a substantial writedown, receiving no more than 85% of the property's current appraised value as payment in full for the existing loan. The new FHA loan must be properly underwritten and be based on current appraised value of the house and a borrower's documented income. Borrowers with higher (but not disqualifying) debt levels would need to make six months of timely payments at the new FHA payment level to qualify for the guarantee.
The new FHA loan must extinguish all existing liens and be within applicable FHA loan limits. Housing and Urban Development will set reasonable limits on loan fees and interest rates. The government will retain a second lien on the property, and when the borrower sells the home or refinances the loan, the borrower will pay from any profits an ongoing exit fee equal to 3% of the original FHA loan balance or a declining percentage of any profits.
The Secretary of HUD will be authorized to take action to facilitate coordination among different existing lienholders.
To protect the FHA Mutual Mortgage Insurance Fund, these new loans will exist in a separate fund in FHA and will be permitted to be resold (together or separately) through GNMA. The bill reserves to the FHA the power to contract for the establishment of underwriting criteria, pricing standards and other factors relating to eligibility and hire personnel.
To prevent fraud, HUD will conduct independent quality reviews to determine underwriter compliance, rates of delinquency, claims and losses and submit semiannual reports to Congress. The HUD Inspector General will also conduct an annual audit of the program. The program will run for two years with flexibility for the secretary to make additional six-month extensions, not to exceed two more years.
The bill also provides $10 billion in loans and grants for the purchase and rehabilitation of vacant, foreclosed homes with the goal of occupying them as soon as possible.