April 4,
2008
NHC Key Foreclosure Principles:
Designed to Help Inform Any Legislation and Plan for Addressing the Crisis
With the
ongoing fallout related to subprime mortgages and the foreclosure crisis
worsening each day, decision-makers are scrambling to fix a broken system to
help protect consumers and communities nationwide. Nearly twenty percent of subprime loans are in
danger of foreclosure. Up to two million
more families could end up in foreclosure in the coming years – approximately
20,000 families per week.
[i]
The
current response to the crisis is inadequate. The voluntary efforts of the
industry through the HOPE NOW coalition have been helpful – with the HOPE NOW hotline
helping one million families
[ii]
– but in most cases the outcome has been to institute repayment plans,
which provide temporary relief, but may or may not help the families keep their
homes over the long run. Similarly,
reform of the Federal Housing Administration to make that institution more
nimble and effective would be helpful, but would not provide an adequate
refinancing vehicle for most of the families in need of assistance.
The scale
of the solutions must fit the enormous scale of the problem. The bipartisan Senate package unveiled
on April 2 contains many helpful elements that address specific aspects of this
crisis. But it noticeably omits any bold plan for restructuring existing
mortgages to help families keep their homes.
Accordingly,
it is crucial for the federal government to step forward immediately with a
comprehensive plan for stabilizing the nation’s economy by helping families and
communities avoid the wave of impending foreclosures. We must speak out on behalf
of families at-risk of foreclosure, families who have already lost their homes
and communities that have been negatively impacted by mass foreclosures. An effective solution to the nation’s
foreclosure crisis will also help shore up the nation’s economy. The prosperity of our country depends on
prompt action.
The
National Housing Conference (NHC), a nonpartisan voice in the housing
community, believes these principles must be included in any legislation or
plan addressing this crisis:
- A New Federally Chartered and
Funded Process is Urgently Needed to Facilitate the Large-Scale Restructuring
of Loans of Families Facing Foreclosure. A bulk restructuring
plan, administered by a new agency or division specially empowered to
administer this process, would be the most effective solution to the nation’s
economic crisis. It would also help to
stabilize families and communities. Case-by-case restructuring is simply too
slow, expensive, and cumbersome to solve the crisis.
- The Loan Restructurings Must Decrease
Monthly Payments to Levels That are Sustainable for Families. To achieve this, investors will have to agree to substantial principal
reductions. In some cases, a second
mortgage from the federal government also may be needed to close any remaining
affordability gap. Structuring this
second mortgage as a “silent” mortgage, in which no payments are due until the
home is sold, will help ensure that families can afford their monthly housing
costs.
- The Federal Government Should Insure
the Restructured Mortgages. The federal government should insure the restructured mortgages at
the current market value to ensure they can be sold on the secondary market.
- Cost-Containment and Cost-Recovery
Measures Must be Put in Place to Reduce the Long-Term Costs to the Public. Requiring principal write-downs will help to contain the level of
subsidy needed to support these restructurings. Requiring families that receive federally-funded silent second mortgages
to repay them upon sale of their home will help the government to recoup its
costs. To ensure that families can build
equity and retain an economic interest in preserving their homes, the cost
recovery formula should provide for sales proceeds to be shared between the family and the government. Depending on how this shared equity component
is structured, it also could provide an incentive for lenders to agree to
principal reductions.
- Involvement of the Secondary Market Should be Encouraged. The
institutions that have been established to provide liquidity to the mortgage
market –Fannie Mae, Freddie Mac, and the Federal Home Loan Banks – can contribute
to these efforts by purchasing the restructured loans.
- Continued and Expanded Funding for
Foreclosure Counseling and Legal Assistance is Essential. Across the country, homeownership
counselors are unable to keep up with the demand for their services.
Additionally, many families in trouble but not seeking help need assistance.
- A Neighborhood Stabilization Strategy
is Essential. In
communities with large numbers of foreclosures, neighborhoods are quickly
eroding due to crime and a shrinking real estate tax base. Funds need to be
provided to state, local or nonprofit entities that have the capacity to buy,
rehabilitate and manage properties so that they can then be sold or rented.
- Protection of Borrowers is Needed
to Prevent Future Crises. Government action is needed to
create a safer lending environment to improve the sustainability of
homeownership over time. Among other
steps to consider are improved disclosures of loan terms, a more robust and flexible
Federal Housing Administration, and clearer regulatory guidelines and
oversight.
NHC strongly endorses both
temporary and permanent interventions to steady the housing market and help
borrowers and communities regain stability.
