By Eugene T. Lowe
March 24, 2008

Rescue plans that would assist homebuyers facing mortgage foreclosure are being discussed in the House and the Senate, and another has been developed by the National Community Reinvestment Coalition, a national economic justice advocacy association. In response, the Mortgage Bankers Association (MBA) has developed a set of principles that it hopes will be used to evaluate rescue plans. Intense lobbying activity continues as it is expected that S. 2636, the Foreclosure Prevention Act, will return to the Senate floor following the Easter Congressional Recess. The Administration is opposed to the rescue plans and S. 2636. But in a major move, the federal government has given Fannie Mae and Freddie Mac permission to reduce the amount of capital by a combined $200 billion that has been required to protect against losses. The $200 billion would be used to invest in more mortgages which will bring relief to the housing market.

ing relief to the housing market.

In the House, Representative Barney Frank (MA), Chairman of the Financial Services Committee, has developed the “FHA Housing Stabilization and Homeownership Retention Act.” The program “would permit FHA to provide up to $300 billion in new guarantees that would help to refinance at-risk borrowers with viable mortgages.” A discussion draft of the legislation says that the program “could potentially refinance between one and two million loans (and help these families stay in their homes), protect neighborhoods and help stabilize the housing market.” In addition, the plan would also provide $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.” Funds would go to the states “based on the state’s percentage of nationwide foreclosures adjusted to account for the state’s median home price.”

Senator Christopher Dodd (CT), Chairman of the Senate Banking, Housing and Urban Affairs Committee, will soon introduce the “Hope for Homeowners Act.” Under this legislation, “new mortgages that are offered by FHA-approved lenders will refinance abusive loans at a significant discount for homeowners facing difficulty meeting their mortgage payments.” The legislation is built on five principles: long-term affordability, no investor or lender bailout, no windfall to borrowers, voluntary participation of servicers, and the restoration of confidence and transparency in credit markets.

The National Community Reinvestment Coalition (NCRC) has developed a new market-driven plan—the Homeowners Emergency Loan Program (or HELP Now). Under the plan, loan pools are purchased by the federal government but sold back to the private market once the loans are discounted and modified with lower principals and interest rates. Loans would be modified eliminating the technical challenges associated with the refinancing of loans. An especially unique feature of HELP Now is that it would offer assistance to families that have lost their homes to foreclosure. Because the loans would be sold back to the private market, there would not be any cost to the taxpayer.

The Mortgage Bankers Association has released eleven principles to evaluate rescue plans. A few of the principles that MBA says the plan should be consistent with are: be a new program, not a new entity, and should use existing institutions or entities; be voluntary for servicers, lenders, trustees, security holders and investors; consider the borrower’s ability to repay the modified mortgage; and not be a bailout of servicers, lenders, trustees, security holders or investors.

Having failed when it was first considered, S. 2636, introduced by Senate Majority Leader Harry Reid (NV) will go back to the Senate floor in April. This bill would fund the Community Development Block Grant (CDBG) program at $4 billion for the purchase of foreclosed or abandoned homes. The bill also includes a provision that would allow bankruptcy judges to modify the loans of homes about to be foreclosed upon. During a speech on the mortgage crisis in New York City on March 14, President George Bush said specifically that he opposes the $4 billion CDBG to state and local governments to buy and resell abandoned homes. The lending industry has also brought intense pressure to remove the bankruptcy provision of the bill.

As for the decision by the federal government’s Office of Federal Housing Enterprise Oversight (OFHEO) to allow Fannie Mae and Freddie Mac to reduce the amount of capital required to protect against losses, Dodd said, “This is a balanced agreement because it allows Freddie Mac and Fannie Mae to play an immediate role in restoring liquidity and confidence to the mortgage markets, while ensuring they will be able to sustain the effort in the longer run by requiring them to raise additional capital. I expect the two companies to use the capital not only to help the markets generally, but also to help subprime borrowers in a much more focused manner.”