On Feb. 18, 2009, President Obama announced the Administration's Homeowner Affordability and Stability Plan (the "Plan"). The Plan aims to accomplish the following three key objectives: (i) refinance mortgages of up to 4-5 million "responsible homeowners" to prevent additional foreclosures; (ii) provide a $75 billion initiative to help up to 3-4 million "at-risk homeowners" primarily through the use of uniform loan modifications; and (iii) help keep mortgage rates low by strengthening confidence in the government-sponsored entities ("GSEs"), Fannie Mae and Freddie Mac. While further specifics of the Plan will be announced on March 4, 2009, the currently available details are summarized below.
I. Refinance of "Responsible Homeowners"
Under the Plan, the Administration seeks to refinance the mortgages of up to 4-5 million "responsible homeowners." Responsible homeowners are those borrowers with conforming loans1 that are currently owned or guaranteed by Fannie Mae and Freddie Mac, and who are current with their mortgage payments, but have a greater than 80 percent loan-to-value ratio ("LTV"). Due to the depreciation of housing values, these borrowers have not been eligible for most government and private refinance programs because their LTVs have been greater than 80 percent. Under the Plan, Fannie Mae and Freddie Mac will allow the refinance of these loans that they hold in their portfolios, or that they placed in mortgage-backed securities. These responsible homeowners will have the opportunity to refinance at today's low rates, which are generally lower than what the borrowers qualified for in the past couple years when their loan was originated.
The refinancing program would include loans where the new first mortgage, including any refinancing costs, will not exceed 105 percent of the current market value of the property. Note that borrowers with two liens on the property will still be eligible for the refinance program as long as the amount due on the first mortgage is less than 105 percent of the value of the property. In the case of two liens, the borrower's eligibility for the program will depend in part on the second lien holder agreeing to subordinate and remain in the second lien position. The current value of the property will be determined after the borrower has made the application to refinance. To qualify, each borrower must prove sufficient income to make the new refinance payment, and provide proof of an acceptable mortgage payment history with their current lender.
Complete eligibility details will be announced by the Administration on March 4, 2009.
II. Loan Modifications for "At-Risk Homeowners"
The Administration also seeks to help up to 3-4 million "at-risk homeowners." At-risk homeowners are those borrowers in owner-occupied homes with conforming loans2 who have high combined mortgage debt compared to income or who are "underwater."3 Under the plan, borrowers who meet the criteria of an "at-risk homeowner" may be eligible for a loan modification. Note that only first mortgages are eligible for loan modifications. Further, mortgages on two-, three-, and four-unit properties will be eligible as long as the borrower lives in one unit as their primary residence.
Importantly, the Plan will also include borrowers at risk of imminent default despite being current on their mortgage payments. Thus, delinquency will not be a requirement for eligibility. Additionally, borrowers who have high total debt (i.e. not just housing debt, but also including car loans, credit card debt, etc.) equal to 55 percent or more of their income may still qualify, but will be required to enter a Department of Housing & Urban Development ("HUD") approved counseling program as a condition for the loan modification.
Finally, eligibility for the modification program under the Plan will sunset at the end of three years.
B. Details on Modifications Methods and Incentives to Parties
The loan modification program for at-risk homeowners will have five primary components, as described below.
i. Joint Effort to Reduce the Borrower's Monthly Payment
The United States Treasury Department will work with many financial institutions to reduce the homeowners' monthly mortgage payments. Under the details provided in the Plan announcement, the lender will have to first reduce interest rates on mortgages to a specified affordability level. This specified affordability level is equal to 31 percent debt-to-income ("DTI"). Under the Plan, the lender must bring down interest rates so that the borrower's monthly mortgage payment is no greater than 38 percent DTI. Next, the Plan will match further reductions in interest payments dollar-for-dollar with the lender, down to a 31 percent debt-to-income ratio for the borrower. This means that the federal government will match any dollar the lender spends to reduce the payment to 31 percent debt-to-income. The Plan requires that lenders keep the modified payments in place for five years to ensure long-term affordability. After that point, the interest rate can be gradually stepped-up to the conforming loan rate in place at the time of the modification. Importantly, the Plan also allows lenders to bring down monthly payments to these DTI affordability targets by providing principal reductions. The Plan will provide a partial share of the costs of this principal reduction, up to the amount the lender would have received for an interest rate reduction.
ii. Incentives to Servicers
The Plan calls for mortgage loan servicers to receive an up-front fee of $1,000 for each eligible modification that meets the Plan's guidelines. Servicers will also receive "pay for success" fees, which will be awarded monthly as long as the borrower stays current on the loan. These pay for success fees are capped at $1,000 each year for three years.
iii. Incentives in Cases Where Default is Imminent
The Plan also includes an incentive payment of $1,500 to mortgage holders and $500 for servicers for loan modifications made in cases where the borrower is current on their payments, but is at risk of imminent default. Because the Administration believes it is essential to provide at-risk homeowners with assistance prior to imminent default, it wants to incentivize modifications in these instances.
iv. Incentives to Borrowers
The Plan provides an extra incentive for borrowers to keep current under the modified loan, by giving a monthly balance reduction payment on the borrower's behalf that goes directly towards reducing the principal balance on the modified mortgage loan. If the borrower stays current on his or her payments, then they can receive up to $1,000 each year for five years in principal reductions.
v. Home Price Decline Reserve Payments
The Administration, together with the Federal Deposit Insurance Corporation (the "FDIC"), has created a partial guarantee program. The Plan calls for an insurance fund to be constructed by the Treasury Department in an amount up to $10 billion dollars. The insurance fund will be designed to discourage lenders from opting to foreclose on mortgages that could be viable in the present day, due to fear that home prices will fall even more in the future. This fund would incentivize lenders to make additional modifications in the present day by assuring that if home valuations decline more going forward, lenders will have access to insurance reserves. The Plan states that owners of loans that are modified would be provided with an additional insurance payment on each modified loan that will be tied to declines in the S&P/Case-Shiller home price index. These payments could be set aside as reserves, providing a partial guarantee in the event that home price declines, and therefore losses in cases of default, are higher than expected.
C. Additional Key Points to the Modification Plan
Note that the plan will focus on creating "sound modifications." Under the Plan, if the total expected cost of a modification for a lender taking into account the government payments is expected to be higher than the direct costs of putting the homeowner through foreclosure, that borrower will not be eligible for modification. Moreover, the Treasury will not provide subsidies to reduce interest rates on modified loans to levels below two percent. Finally, note that unless lenders received funds from the Financial Stability Plan, they are not required to participate in the modification program. However, the Administration expects most major lenders will participate in the modification program due to these new incentives provided for modification.
Complete eligibility details will be announced by the Administration on March 4, 2009.
D. Other Salient Aspects of the At-Risk Modification Plan
i. Uniform Guidelines for Loan Modifications
In connection with the program for at-risk borrowers, the Administration will work with the FDIC, the Federal Housing Administration (the "FHA"), the Federal Housing Finance Agency (the "FHFA") and the federal banking agencies to develop uniform guidelines for sustainable mortgage modifications for all federal agencies and the private market. The guidelines will also include detailed procedures for loss mitigation efforts and identification of borrowers at risk of default. As aforementioned, the Administration expects to announce these guidelines by Wednesday, March 4, 2009.
ii. Financial Stability Plan Recipients
As announced last week, the Treasury Department will require that all Financial Stability Plan recipients participate in the foreclosure mitigation plans, including the new at-risk homeowner modification plan.
iii. Bankruptcy Cramdown Provisions
Importantly, the Plan notes that the Administration will seek careful changes to bankruptcy law regarding individual bankruptcy filings. Under the changes the Administration feels are necessary, when an individual enters personal bankruptcy proceedings, their mortgage loans in excess of the current value of their property would be treated as unsecured debt. This change would allow a bankruptcy judge to develop an affordable plan for the homeowner to continue making payments. The Plan seeks to permit bankruptcy judges to modify mortgages originated in the past few years as a last resort when borrowers have exhausted other options. The Plan states that this "cramdown provision" will apply only to existing mortgages under Fannie Mae and Freddie Mac conforming loan limits.
iv. Oversight and Quarterly Meetings
Loan-level data from modifications made under the Plan will be gathered in order for the government and the private sector to measure success and make necessary changes, where required. To this end, the Treasury Department will meet quarterly with the FDIC, the Federal Reserve, HUD, and the FHFA, to ensure that the program is on track to meeting its goals.
v. HOPE for Homeowners and Local Programs
In order to ensure that more borrowers participate in the Hope for Homeowners Program, the FHA will reduce fees paid by borrowers, increase flexibility for lenders to modify troubled loans, permit borrowers with higher DTIs to qualify, and allow payments to servicers of the existing loans. Also, as part of the recovery act signed by the President, HUD will award $2 billion in competitive Neighborhood Stabilization Program grants for innovative programs that reduce foreclosure. Finally, the recovery act also includes an additional $1.5 billion to provide renter assistance, reducing homelessness and avoiding entry into shelters.
III. Strengthening Fannie Mae and Freddie Mac
The third part of the Plan provides more strength and resources to Fannie Mae and Freddie Mac. The Plan announced that the Treasury Department is increasing its Preferred Stock Purchase Agreements with Fannie Mae and Freddie Mac to $200 billion each from their original level of $100 billion each. The Treasury Department notes that it will also continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity in the marketplace. Simultaneously, the Treasury will begin increasing the size of the GSEs' retained mortgage portfolios by $50 billion to $900 billion (along with corresponding increases in the allowable debt outstanding). The Administration will work with Fannie Mae and Freddie Mac to support state housing finance agencies in serving homebuyers across the nation on the state level. Finally, the Administration emphasizes that the $200 billion in funding commitments are being made under the Housing and Economic Recovery Act and do not use any money from the Financial Stability Plan or the Emergency Economic Stabilization Act or the TARP programs.