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House Approves Bill Allowing Bankruptcy Judges to Modify Home Loans
The House on March 5 passed H.R. 1106, legislation that would allow bankruptcy judges to modify mortgages for primary residences. The bill would allow judges to reduce the value of a loan, extend the terms of the loan, lower the interest rate, delay the effective date of an adjustable rate increase, and make other similar changes to a mortgage in order to save the home from foreclosure. NAHB believes that any changes to the bankruptcy code must be limited in scope, temporary and apply only to current mortgages. NAHB urged Congress to further narrow the bill so it only focuses on those mortgages responsible for the surge in defaults.
The House took several steps to move in this direction, such as limiting the measure to existing mortgages and including changes intended to ensure that the legislation does not negatively impact FHA and VA-backed mortgages. The bill would also deny relief to individuals who can afford to repay their mortgages without judicial modification and allow lenders to collect a portion of the profit if a home is sold within four years of modification. Finally, the bill discourages bankruptcy judges from reducing the value of a mortgage if lowering the interest rate alone would result in affordable payments.
Additional changes to narrow the bankruptcy provisions are likely in the Senate.
The legislation also includes several other housing and financial provisions that would address the nation's foreclosure crisis and provide safe harbor to lenders that modify the terms of mortgages. It would overhaul the Hope for Homeownership program intended to help struggling home owners to refinance into FHA-backed loans and stay in their homes.
The legislation would permanently lock in the current $250,000 insurance limit for the Federal Deposit Insurance Corp. and index the limit to inflation starting in 2015. The limit was temporarily raised from $100,000 to $250,000 after the $700 billion financial bailout legislation was enacted last fall. The FDIC’s borrowing authority would be boosted from $30 billion to $100 billion.
Finally, the legislation is designed to shield lenders from lawsuits by providing mortgage servicers that rework mortgages a “safe harbor” from lawsuits if a home owner defaults on a revised loan or appears likely to default. For more information on the legislation’s bankruptcy provisions, contact J.P. Delmore at 800-368-5242, x8412. For information on other provisions in the bill, contact Scott Meyer at x8144.
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Administration Releases Details of Foreclosure Relief Plan
President Obama last month unveiled a broad, multifaceted Homeowner Affordability and Stability Plan that is aimed at preventing millions of foreclosures. The plan has three main elements: a refinance program for borrowers with limited equity but who remain current on their payments; a $75 billion loan modification program for struggling home owners; and steps to bolster Fannie Mae and Freddie Mac to shore up the mortgage market. Details of the mortgage refinance and modification initiatives were released on March 4 as the Making Home Affordable (MHA) program.
Home Affordable Refinance Program
The Administration believes its plan will enable Fannie Mae and Freddie Mac to refinance four million to five million home owners. Currently, these institutions have rules that make it difficult to refinance mortgages valued at more than 80 percent of the home’s worth.
For example, on a home valued at $300,000 with a mortgage of $270,000, a home owner might have trouble refinancing through Fannie Mae and Freddie Mac. The two giant mortgage lenders announced on March 4 that these limitations will be removed so that they can refinance mortgages they already own or guarantee. Under the plan, Fannie and Freddie will refinance loans for borrowers who owe up to 105 percent of the current value of their home, as long as their mortgages are held or guaranteed by either of the two financial institutions. There is no income ceiling for the beneficiaries.
The refinancing initiatives will begin on April 1 and the refinanced mortgages must be originated by June 10, 2010.
Home Affordable Modification Program
The plan would build on the loan modification protocol developed by the Federal Deposit Insurance Corp., where a loan is modified by reducing the interest rate, increasing the term and/or deferring or reducing principal payments. It would create new incentives for lenders to work with borrowers to modify the terms of loans at risk of default or foreclosure. This would require both borrowers and lenders to do their part. Lenders would be required to reduce payments to no more than 38 percent of a borrower’s income. The government would provide a subsidy to help further cut the borrower’s mortgage debt-to-income ratio to 31 percent.
To encourage lender participation in the program, the plan provides them with additional financial incentives to modify loans prior to default.
The program also encourages borrowers to stay current on their payments. Those who participate will be required to make payments on time in return for this opportunity to reduce their monthly mortgage payments and stay in their homes. Home owners who remain current on their mortgage payments following loan modification will be eligible for an incentive of up to $1,000 a year from the government for five years. The bonus will be applied to the borrower’s mortgage to lower the principal balance.
The program is expected to reach up to 3-4 million at-risk home owners at a cost of up to $75 billion.
The program is available until Dec. 31, 2012, but loans can only be modified once.
Eligibility is based on high mortgage debt payments compared to income, or borrowers that are underwater. Delinquency is not a requirement for eligibility. This program will also serve home owners who have not missed payments, but who are in danger of doing so. To increase the potential success rate, the modification program requires HUD-approved counseling for families with high (55 percent) total debt-to-income ratios.
Eligible mortgages must have been originated on or before Jan. 1, 2009. The unpaid principal balance must be equal to or less than $729,750 (the current loan limit ceiling) and there is no maximum or minimum loan-to-value requirement.
Initiatives to Bolster Fannie Mae and Freddie Mac
The plan seeks to shore up Fannie Mae and Freddie Mac to help keep mortgage rates low for millions of middle-class families looking to buy a new home or to refinance an existing one.
The Treasury Department will provide additional financial support for Fannie and Freddie and allow them to increase their portfolios, which is designed to help the broader mortgage finance market.
The Treasury and the Federal Reserve will also continue purchasing Fannie Mae and Freddie Mac mortgage-backed securities to lower mortgage rates and to maintain stability and liquidity in the marketplace.
The foreclosure prevention package also calls on Fannie and Freddie to provide support to state housing finance agencies. These agencies are currently frozen out of the credit markets and are unable to provide much-needed support to first-time home buyers.
For more information, e-mail Bill Renner or call him at 1-800-368-5242, x8597.
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Bid to Strip ESA Rider from Senate Spending Bill Falls Short
NAHB, together with its partners in the National Endangered Species Act Reform Coalition, supported an amendment offered by Senators Lisa Murkowski (R-Alaska) and Mark Begich (D-Alaska) to address a rider added onto the Omnibus Appropriations bill (H.R. 1105) dealing with two Endangered Species Act regulations (one on Section 7 consultation and another on polar bears). These regulations, which NAHB supports, aim to reduce permitting delays, especially for informal interagency consultations under Section 7 of the Endangered Species Act. Finalized in December and in effect since mid-January, these new regulations require informal consultations to be completed within 60 days, with a single 60 day extension. Without these deadlines, informal consultations can often take over a year. The new regulations will greatly speed up the federal permitting process for builders.
These regulations have drawn significant opposition from the environmental community. In response, Section 429 of the omnibus bill would allow the Interior Department to kill the new Section 7 consultation regulations in a highly irregular and unprecedented process without any public notice or comment. The Murkowski-Begich Amendment would have restored the normal rule making requirements, preventing the Administration from unilaterally killing the new regulations.
Unfortunately, after House Speaker Nancy Pelosi (D-Calif.) announced that the House would accept no Senate amendments to the omnibus bill, the amendment failed by a vote of 42 to 52. At this point, the Senate is one vote short of passing the omnibus bill, so the future of the legislation—and Section 429—remains in doubt. For more information, contact J.P. Delmore at 1-800-368-5242, x8412.
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