Earlier this month, President Bush announced a voluntary five-year interest rate freeze plan for sub-prime borrowers facing large increases in their monthly mortgage payments due to rate resets. The plan is intended to assist the estimated millions of borrowers who financed the purchase of their homes through adjustable rate mortgages that often come with lower introductory rates that reset to higher rates at the conclusion of a two year teaser period. However, this relief is not meant for all borrowers, since it is mainly geared towards borrowers who can afford their existing rates and are current on their payments but who may face default after their rate resets. Under the proposal, borrowers with solid credit would refinance their existing loan into a more affordable mortgage like those offered under the Federal Housing Administration. To facilitate this plan, the President expanded the FHA program so that it could reach an additional 240,000 distressed borrowers by next year.
The problems posed by the sub-prime meltdown are multi-faceted and, therefore, relief provided to borrowers must be counterbalanced by relief granted to investors. In reaction to this reality, in November, the U.S. House of Representatives passed sub-prime legislation targeted, in part, at supporting those who securitize sub-prime mortgages as marketable investment products. The bill, H.R. 3915, Mortgage Reform and Anti-Predatory Lending Act of 2007, focuses on tightening lending regulations, seeking to prevent lenders from making loans to those who lack the ability to repay. H.R. 3915 also authorizes a national licensing system for loan officers and mortgage brokers to enforce minimum standards.
Most importantly, H.R. 3915 creates a private cause of action for homeowners with loans that allegedly violate the legislation's provisions regarding reasonable ability to re-pay against those who purchase or otherwise receive mortgage loans for the purpose of converting them into securitized investments. H.R. 3915 does provide an exception from those securitizers who provide a cure for non-conforming loans or have implemented a policy against receiving non-conforming loans. Our post last month on H.R. 3915 can be found here: http://www.insurereinsure.com/BlogHome.aspx?entry=316.
In connection with H.R. 3915, Senator Dodd (D. Conn.) recently introduced, S. 2452, the Homeownership Preservation and Protection Act of 2007. S. 2452 aims to realign the interests of the mortgage industry with borrowers to insure the availability of mortgage capital. The Act seeks to achieve this goal by establishing new lending standards to ensure that loans are affordable and fair, and providing for adequate remedies to make sure these standards are met. Key aspects of S. 2452 include a ban on prepayment penalties for high cost loans that virtually prevent borrowers from refinancing into lower interest rate loans. Other changes include a ban on financing any portion of the points or fees associated with a home loan – a prohibition designed to discourage lenders from “flipping” the mortgage in order to extract additional excessive fees; the disallowance of balloon payments; eliminating the use of Yield Spread Premiums in high-cost and sub-prime loans for placing a borrower in a loan that is more costly than that for which the borrower qualifies; and the creation of a fiduciary duty for mortgage brokers towards borrowers.
S. 2452 also includes the private cause of action provided for in H.R. 3915, and includes the exception for limiting the class-action liability of assignees who exercise due diligence to avoid funding and buying these loans on the securitized market. However, S. 2452 does not include any of the provisions established in H.R. 3915 for the national licensing system for loan officers and mortgage brokers. You can read the entire text of S. 2452 here
Alleviating Tax Liability
In connection with the recent sub-prime mortgage legislation, the U.S. House of Representatives also approved H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007 on December 18, 2007. H.R. 3648 creates a fix for a tax issue concerning the income realized by a borrower when debt is forgiven by the lender. Under the current tax code, debt forgiveness following a mortgage foreclosure or renegotiation is considered taxable income, thereby creating a tax liability for troubled homeowners. H.R. 3648 proposes to exclude such amounts from taxable income, lowering the economic hardship felt by those whose homes have been foreclosed upon. In addition, the bill also extends the tax deduction for prospective homebuyers on amounts paid for private mortgage insurance. You can read the entire text of H.R. 3648 here.
We will continue to monitor developments with respect to this and other sub-prime related matters and report them to you on www.InsureReinsure.com.