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New Homeowner Rescue Program
Near
New Buyers & Investors
Returning to the Market
Trick or Treat: Who is the
Homeowners’ Candidate?
New Tool for Homeowners at
Risk of Foreclosure
Get Involved in Your Future,
AHGA Urges
New Homeowner
Rescue Program Near
 President Bush is weighing a
new proposal to help homeowners.
Among the options is a $40-50
billion program to help forestall foreclosures which could
support the modification of as many as 3 million troubled
mortgages. It is as yet unclear whether the program would
require new funding or come out of the existing $700 billion
financial rescue funds, which are already facing heavy
commitment demands. Also unclear is whether the program
would be mandatory, requiring all lenders to participate.
Many sources believe that it would likely include loan guar antees
or credit enhancements, but it is also possible that the
government would buy mortgages from lenders and renegotiate
the terms with threatened homeowners. We are likely to learn
the final shape of it in the very near future.
Democratic leaders are also
working on a
new broad additional stimulus program that may
indirectly help support home values by strengthening the
economy. It might be considered in a lame duck session of
Congress after the election or early next year. Modeled
after a September House Bill, the House Democratic proposal
is expected to focus on such areas as
infrastructure
investment, aid to cities and states, an extension of
unemployment insurance, and possibly supporting job creation
in clean energy industries and expanding broadband Internet
access.
According to Moody's
Economy.com, about 7.3 million American homeowners will
likely default on their mortgages between now and 2010, and
about 4.3 million of them will lose their homes, unless
somethi ng is done. Details of the
initiatives are still in flux, but should soon come into
focus as mounting economic threats increases the need for
further action.
The Administration’s efforts
are a tacit admission that an earlier program to encourage the
mortgage industry to voluntarily modify the original terms
or mortgage balances for threatened homeowners has been
unsuccessful. It also suggests that the Administration fears
that the FHA’s $300 billion “Hope for Homeowners” program,
launched in October, is not going to provide enough help to
threatened homeowners either. The latter provides government
insurance for a new mortgage, if the lender agrees to reduce
the loan balance.
To cover potential government
losses on the refinanced mortgages, rescued borrowers would
in return have to agree to share future home price
appreciation with the federal government upon the sale of
the home.
Evidence of the inadequacy of
the efforts to date is the fact that we are seeing signs
that some lenders would rather reprice their foreclosed home
inventory downward and sell the homes at market value,
instead of participating in these programs. The evidence is
based on both anecdotal reports of growth in the sale of
foreclosed properties, and the fact that home prices
continue to drop at a record pace. Declining values is the
problem that the government programs are attempting to
mitigate, since the declining values are liquidating the net
worth of all 75 million U.S. homeowners. The vast majority
of American homeowners are not at risk of foreclosure, but
they are also losing a significant amount of their
home equity and largest source of
lifetime
savings through no fault of their own.
The Presidential candidates
have also expanded on their own original housing rescue
proposals.
Senator Obama is now proposing
that any lender benefitting from the rescue fund must hold
off
for three months
on foreclosures for those who have been making a
good-faith effort to renegotiate their home loans. Senator McCain proposes directing $300 billion of
the rescue funds to buy troubled mortgages and replace them
with mortgages the homeowners can afford.
It is clear that we need to
raise
the incentives for lenders to participate
in programs to help threatened homeowners.
The current programs are designed to enable them to get
nonperforming mortgages off their books at market prices.
Our nation can’t afford to make them whole (and shouldn’t),
but perhaps if we could cut their losses on each
nonperforming mortgage slightly, more would be willing to
participate. Paranoia about taking any lending risk is
gripping the financial markets right now. As financial
services firms build their cash positions by liquidating
nonperforming mortgages, the need to deploy those cash
assets to maximize returns will increase, and their fear of
lending should also begin to subside.
The
Treasury Department will begin
to buy mortgages from banks at auction in coming weeks, and
the lenders response will tell us a lot about the prospects
for other efforts to help bolster home prices. The logical
action will be for lenders to sell nonperforming or
threatened mortgages to the government at their
market value, which will be
substantially less
than the mortgage balance.
At some point the government will
have done as much as it can to mitigate the problem
given budget realities. There
is nothing the government can or should do to help a
homeowner who has no income as a result of job loss or other
circumstances. We don’t intervene in such cases in a healthy
market, and we can’t afford the price in this market.
Lenders need to understand that the
opportunity to reduce their
foreclosure losses will end, and they
shouldn’t expect that they can sit on the sidelines until
the government bids up the price on nonperforming mortgages
enough to make them whole. None of the organizations or
politicians who support government intervention would
support such an outcome, and many do not support government
intervention in the first place.
Since the government will be
paying less than the mortgage balance for these mortgages,
AHGA has proposed that
the government should pass those
savings on to threatened homeowners in a way that eliminates
or minimizes government costs. It should allow those homeowners
who are behind in payments, or likely to get behind in
payments, to refinance the homes at the same amount the
government paid for their mortgage if the homeowner can
afford it. The new mortgage should be substantially less
than the balance on the homeowner’s previous mortgage, and
many of those homeowners can afford a traditional 30 year
mortgage on that smaller amount. Former owners who had been
foreclosed and evicted should also have first right of
refusal to participate. For those homeowners who don’t earn
enough to qualify without help, the government should offer
them a 30 year fixed rate mortgage at rates as low as 4% if
necessary for them to afford the payments.
Why 4%? Three reasons:
1. This would help a
large share of those homeowners avoid foreclosure or
reclaim their homes. This alone would go a long way
towards solving the crisis.
2. The government’s
proceeds would be based on the full price the
government paid for the mortgage, and the
government’s mortgage interest income would cover
the government’s cost of borrowing the money to
finance that mortgage. The average homeowner owns a
home for about ten years before they sell it. The
current interest rate on a ten year Treasury note is
just under 4%, so between the two there would be
little or no net effect on federal revenues.
3. It is very likely
that home values will increase enough over the next
decade, so that between appreciation and mortgage
principle pay downs, very few mortgages would still
be underwater by then. The longer the mortgage is
outstanding, the greater the homeowner’s equity and
the less the government’s risk of loss.
The government should rent
out at market rates those remaining homes it ends up owning.
In many cases market rents would be even less than payments
on a 4% mortgage. Former owners who couldn’t
afford a 4% mortgage should be given right of first refusal
on leasing back their former homes if they can afford to pay
market rate rents. This would reduce the number of family
displacements and induce many to voluntarily surrender their
deed, since they would have a chance of restoring their
ownership in the future. Tenants should be given the option
to buy the homes at 97% of the home’s fair market value at
the conclusion of the lease (this would split the savings on
the typical 6% real estate sales commission between the
government and the buyers). Once the inventory of homes for
sale draws down to normal levels, the government could begin
gradually offering any remaining rental properties the tenants don’t buy
back into the resale market.
Some of those
government-owned homes would also be appropriate for
conversion into low income housing, using existing criteria
or by making minor modifications to existing criteria. Since
spending for low income housing is an ongoing federal budget
expenditure anyway, those costs would not be charged against
this program.
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New Buyers & Investors Returning to the Market
Sales are up, and several
factors are contributing.
Sales of existing homes
increased in September as more buyers came back to the
market. Sales rose 5.5 percent in September from August, and
were up 1.4 percent from the previous September, according
to the National Association of Realtors. The latter was the
first time since November 2005 that sales were above the
prior year’s level for the same month. Sales were also up in many
of the hardest hit housing markets.
Several factors are at work
in the growth in home sales. Unfortunately one of them was a
continuing decline in home prices. More investors and owner
occupants appear to be concluding that we are near the
bottom of the market, and are buying now while the choices
are still numerous. Still, that’s not all bad. In previous
housing downturns increased sales are usually harbingers of
recovering prices.
As selling prices continue to
drop we are beginning to approach historic relationships
between selling prices and buyer’s income. Put another way,
homes are becoming more affordable, and the risky loans that
caused the mortgage crisis are becoming unnecessary. One
economics firm recently predicted that we will reach that
point by the end of 2009 or early 2010 at the present rates
of decline. Investor interest also perks up in markets with
good rental demand whenever prices drop to a level that
rental income can cover total carrying costs.
The $7,500 first time buyer
tax credit passed by Congress earlier this year is also a
likely factor. Consumers with incomes below a threshold
level who buy a home before June 30, 2009 will receive a tax
credit for 10% of the home’s selling price, up to $7,500.
The credit must be repaid in future years, but its immediate
impact will be to effectively enable many consumers to buy a
home with no net cash outlay. Another provision in the same
Congressional package will allow homeowners who do not have
enough mortgage interest deductions to make it worth
itemizing on their federal tax returns to deduct up to
$1,000 of their real estate property taxes anyway, and this
could also be helping low income homeowners.
Another factor is pent up
demand. Many home buyers have been sitting
on the sidelines for some time. Some can no longer wait due
to a variety of factors such as new jobs in other cities.
The big question is the
effect of the economic downturn on future home sales growth.
October was one of the ugliest months in our nation’s
economic history. Not only did the stock market tank, but
unemployment rose significantly. And many more foreclosures
are in process and likely to hit the market next year unless
the government intervenes. Many of the emergency measures
passed by Congress have had little effect, but some have
yet to be implemented and others are in the pipeline. Time
will tell, but we are undoubtedly at a critical point, not
just for the recovery of housing prices, but also for the
entire international economy.
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  Trick or Treat: Who
Is the Homeowners’ Candidate?
Many factors are involved,
and the best one for you depends on your circumstances.
Senator Obama or Senator
McCain? Which one is best for housing, and which is best for
homeowners? Those are two separate questions, and the first
is easier to answer than the second.
Senator Obama's housing plan
has five components:
● crack down on mortgage
fraud and "fraudulent brokers and lenders"
● create a 10 percent
"universal mortgage credit" for homeowners who don't itemize
● STOP FRAUD Act:
establish a federal
definition of mortgage fraud, increase funding for federal
and state law enforcement, create new criminal penalties for
mortgage professionals found guilty of fraud, and require
industry insiders to report "suspicious activity"
● Homeowner Obligation Made
Explicit (HOME) score, simplified standardized metric
(similar to APR) for home mortgages, which would "allow
individuals to easily compare various mortgage products and
understand the full cost of the loan."
● allow bankruptcy courts to
modify individual's mortgage payments
The STOP FRAUD Act
creates
civil and criminal penalties for mortgage professionals who
defraud any person or financial institution in the process
of providing a mortgage. The Act would
help reduce the number of home buyers who get stuck with
unsuitable mortgages. We heartily support Obama’s express
commitment to make sure homebuyers have honest and complete
information about their mortgage options, including the
creation of the Homeowner Obligation
Made Explicit (HOME) score.
We can expect that Obama would
urge HUD to continue resisting the efforts of lenders and
others to weaken the disclosures in the proposed RESPA
reform. He might even encourage HUD to strengthen them
instead, as we and others have also proposed. All of these
will help reduce the number of future foreclosures and
prevent another mortgage meltdown, which in turn should help
reduce mortgage rates slightly.
Allowing bankruptcy courts to
modify individual's mortgage payments will encourage
mortgage lenders to rediscover the benefits of sound
underwriting practices. This will make investors wary of
buying mortgage packages in the future unless they can be
assured that the loans have been soundly underwritten. As a
result, subprime mortgages and “liar loans” will be much
harder to get in the future and the mortgage market will
become more stable.
A 10 percent "universal
mortgage credit" for homeowners who don't itemize would
really be helpful to the housing market right now. There is
no tax benefit if your mortgage interest deduction is too
small to make it worth itemizing. This credit would make
homes affordable for more first time and low income home
buyers and would help bring them back into the market. It
would probably not have enough of a stimulative effect to
raise prices in the many declining real estate markets, but
it may very well have enough of a positive influence to help
stop the decline in home values, another welcome benefit.
Senator McCain has proposed a
mortgage refinancing plan for "deserving" homeowners who:
● live in their home;
● can prove credit worthiness
at the time of the original loan;
● are either delinquent, in
arrears on payments, facing a reset or otherwise demonstrate
that they will be unable to continue to meet their mortgage
obligations; and
● can meet the terms of a new
30-year, fixed-rate FHA mortgage on their existing home
based on home's current value. Future gain on the sale would
be divided among the homeowner, lender and government.
Senator McCain’s refinancing
plan is similar to HUD’s Hope for Homeowners and FHASecure’s
recent expansion, and is redundant in many respects to its
qualifications, write down requirement and the 30 year fixed
rate mortgage outcome. For example, section 1403 of the July
30 housing law requires mortgage servicers to modify loans
on primary residences for homeowners if they are already in
default (or default is “reasonably foreseeable”) and the
lender will probably recover more through the loan
modification/workout than through foreclosure.
One challenge for qualifying
for McCain’s program will be its requirement to “prove
creditworthiness at the time of the original loan.” Many
homeowners may no longer have all the documentation that
they used to provide credit worthiness at the time of the
original loan, and if they are behind on their mortgage
their current credit worthiness is impaired. McCain
estimates that 200,000 to 400,000 families would benefit.
This is a small fraction of those who are at risk of
foreclosure, but any help is appreciated.
Senator McCain's Web site states:
● no taxpayer money should be
used to "bail out" speculators or financial companies that
didn't "perform due diligence in assessing credit risks"
● assistance for borrowers
should be focused on homeowners
● government assistance to
banking system should be based on preventing systemic risk,
and
● any policy of financial
assistance should be accompanied by reforms that promote
greater transparency and accountability
We believe that most
homeowners agree with this philosophy. Unfortunately the
fate of homeowners is also tied in many respects to the fate
of the financial community. We can only go so far in
punishing irresponsible financial services firms and
executives before running into the risk of undermining the
viability of the entire financial system.
On balance, Senator Obama’s
program is far more comprehensive, but it will also be more expensive. While the American Homeowners Grassroots
Alliance does not support particular candidates, we also
believe that the housing market and
the entire economy are at substantial risk of further
serious deterioration. For that reason a more massive
response is required. While AHGA might allocate the
resources differently, a response along the level
proposed by Senator Obama will definitely be required to
stem the decline.
For most homeowners there are
many other factors that will impact their economic future
besides the future of home values. These include such things
as health care costs, the health of the economy and its
impact on jobs, and many others. The presidential debates
and the campaign commercials have offered precious little
details about the candidate’s proposals in these areas, and
homeowners need that information to make a sound decision.
Although the independent tax policy institute has determined
that the typical taxpayer making less than $200,000 annually
will be better off under Obama while those making over
$200,000 will be better off under McCain, the calculations
make a number of assumptions that will not apply to many
homeowners. Some who make less than $200,000 might find
themselves better off under Senator McCain’s proposals, and
others making more than $200,000 might still find themselves
better off under Senator Obama’s.
The only way to know is
through research. AHGA recommends that homeowners set aside
some time before November 4 to visit both candidate’s web
sites and review the details of their proposals. Also go to
other independent sources who have analyzed their proposals.
The websites of Consumers Union, AARP, and many other
membership organizations have also done independent analysis
of the candidate’s positions. Many newspapers and other
media sources have also developed thoughtful analyses (The
Wall Street Journal has a good analysis of the two
candidate’s positions on economic-related issues at
http://online.wsj.com/article/SB122497140074869661.html?mod=djemPJ
). There are also many comparisons of Senator McCain’s and
Senator Obama’s healthcare, energy/environmental, and other
proposals. If you Google “compare McCain and Obama
healthcare” you’ll get 11,400 hits, and you can pick
comparisons from both independent sources and organizations
with philosophies similar to your own.
The one thing we can say with
certainty is that next Tuesday the more than 70 million American
homeowners will determine the next President in this close
race. Homeowners are more likely to vote than members of any
of the other voting blocks except retirees, which is a
smaller demographic. Many homeowners are also the political
moderates and/or the independents that both McCain and Obama
need to win. Neither candidate has an inherent advantage
with them. Homeowners were evenly split politically in exit
polls in the 2000 election. One third said they were
Democrats and one third said they were Republicans. The rest
were independents. The next President will
be the candidate who convinces the most homeowners that
their vision and proposals are best.
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New Tool for Homeowners at Risk of Foreclosure
Mortga ge
servicers must modify loans for many homeowners.
If you are a
homeowner and at risk of losing your home to foreclosure,
you may be covered by a new law that can help you, according
to the CMPS Institute, an organization that certifies
mortgage bankers and brokers. Section 1403 of the housing
bill that was signed into law on July 30, 2008 (HR 3221)
requires mortgage servicers to modify loans for homeowners
and help them avoid foreclosure as long as three
requirements are met:
1. Default on
the mortgage either has already happened or is “reasonably
foreseeable”
2. The home
owner is living in the property as his or her primary
residence
3. The lender
is likely to recover more through the loan modification or
workout than by forcing the home owner into foreclosure
This law is
effective immediately, and many distressed home owners are
simply unaware of it. “This law requires servicers to act in
the best interest of all their investors and obligates them
to modify your loan if you can afford the modified loan
terms and if they are likely to recover more for their
investors by working with you than by going all the way
through the foreclosure process,” said Gibran Nicholas, the CMPS
Chairman.
If you are at
risk of foreclosure or in the process of being foreclosed, it
is critical that you contact a nonprofit mortgage counseling
service to help you through the process. Their services are
free. You can find your local nonprofit mortgage counseling
service through your local government or Google “nonprofit
mortgage counseling service + your town/county name”.
Beware of
for-profit mortgage counseling services. Although some are
honest, many are scams and they all are expensive. When
negotiating a loan modification with your mortgage lender,
the nonprofit counseling service can help you identify your lender’s
loss mitigation department and help you through the process.
Usually
you’ll need to write a hardship letter demonstrating job
loss, serious medical condition, balloon payment coming due,
adjustable rate reset or some other financial calamity that
will make it impossible for you to continue making your
mortgage payments as scheduled. Unless you are in imminent
danger of default as required by this new law, lenders are
not likely to work with you.
You’ll need
to send the lender your financial statements, employment
records, tax returns and bank statements demonstrating how
you would be able to afford the modified loan terms under
your present financial circumstances
You’ll also
need to send the lender any information you have regarding
the value of your home, such as your annual tax assessment.
Even better would be documentation on recent comparable
sales in your neighborhood. You can get these from websites
like Zillow.com or a local real estate agent who might be
willing to help. These are likely to be more accurate and
realistic estimates (i.e. lower). The objective is to
demonstrate how the lender is likely to recover less money
through foreclosure than they would by working with you in
your proposed loan modification plan. CMPS has a sample
letter you can use to request a loan modification at
http://www.cmpsinstitute.org/pdf/SampleLoanModificationRequest.pdf
Keep in mind
that Congress and the Administration have more rescue
problems in the works, and that new sources of assistance
may soon be available.
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Get
Involved in Your Future, AHGA Urges 
Homeowners must up their
engagement or face even greater challenges in the
future.
The disasters that have struck American homeowners and
other consumers this year underscore the need for both to
ramp up their engagement with all levels of government. The
problems may have started with failures at the federal
level, but the financial implications are also affecting
state and local governments. State and local government
budgets are severely challenged by lower tax revenues due to
falling home values, slumping state and local economies, and
likely constraints in the federal government’s ability to
provide any help due to its own growing budget challenges.
There are going to be ever greater demands for dwindling
funds, and homeowners are increasingly likely to find
themselves the primary target for new tax revenues at the
same time that federal, state, and local programs that help
them are cut. As an example some states have sought to
increase real estate transfer tax rates to offset loss of
revenues due to declining home sales and lower prices.
Many local governments are also addressing their budget
challenges by increasing the property tax rates to offset
declining housing values. Most governments at all levels are
facing budgetary cutbacks that may force them to reduce
spending on healthcare, education and many other areas vital
to homeowners and other consumers as well as the nation’s
future. The combined effect on homeowners in many cases will
be more taxes and fewer services, unless homeowners expand
their engagement in the process.
There are many ways to do so. You can engage with other
national organizations like the American Homeowners
Grassroots Alliance that have particular areas of expertise
and focus. Other national groups have a broader focus. Among them are groups like AARP (AARP.org) that
focus mainly on issues of importance to people in their
category of membership.
Other national groups have an even broader focus.
Consumers Union (CU), nonprofit publisher of Consumer
Reports, is ramping up its advocacy program. AHGA President
Bruce Hahn was invited to CU’s second National Advocacy
Conference in late October. CU (www.CU.org)
is seeking to broaden it’s national policy advocacy program
by reaching out to both advocates and advocacy organizations
at all levels to find ways to multiply their mutual
effectiveness. “The CU advocacy program expansion is badly
needed”, observed AHGA President Bruce Hahn. “We can work
with organizations like CU and multiply our effectiveness,
and organizations like CU cover other issues that are beyond
AHGA's scope or resources”, he added.
It is also important to work with effective advocacy
organizations at the state level. For example AARP has
particularly strong state chapters. AHGA’s President also attended
AARP’s Virginia Chapter October Advocacy meeting, where the House
Majority leader and Governor Kaine’s senior staff exchanged
views with an organization representing over 1 million
Virginia voters.
There are many other effective organizations like CU and
AARP at the national, state, and local levels. They range
across the political spectrum from liberal to conservative,
and have wide ranging policy interests. According to AHGA’s President, “Whatever your political leanings, it is
important for homeowners to get involved with more
organizations that are fighting for their interests. Just as
our organizations need to work more closely together in
these challenging times, our respective members also need to
broaden their support and engagement with other
organizations if we are to succeed”.
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