Federal Responses to the Foreclosure Crisis Foreclosure Solutions Forum

1. Federal Responses to the Foreclosure Crisis Foreclosure Solutions Forum Baltimore Homeownership Preservation Coalition April 21, 2009 Julia Gordon, Senior Policy Counsel Center for Responsible Lending (DC)

2. Center for Responsible Lending Nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. Affiliated with Self-Help, one of the nation’s largest community development financial institutions, which has provided over $5.6 billion of financing to low-wealth families, small businesses and non-profits through direct lending and a secondary market operation. 2

3. Housing & Foreclosure Landscape • Foreclosures: • 13 million defaults from 2008Q4 until 2014 • More than 1 in 10 homeowners in trouble. • Increasing Prime delinquencies: 4Q: 2.4% seriously delinquent vs. 1.1% at the end of 1Q 2008. • Nearly 1 in 5 homes underwater. • $3+ Trillion in Credit Losses • Mortgage lending • $1.61 trillion in 2008 vs. $2.65 trillion in 2007 • Subprime market almost entirely gone • Home sales/construction • Existing home sales dropped 24% • New home sales & new construction starts dropped 54% & 58% respectively

4. Maryland Foreclosure Picture (based on data from 3Q 2008)

5. 2nd Wave – Alt-A and Option ARMs 5

6. Performance Across Loan Products

7. What’s Being Done About It?

8. Existing Obstacles to Voluntary Modifications Second Liens Pooling and Servicing Agreement Limitations Insufficient Servicer Staffing Misaligned Financial Incentives for Servicers Fear of Investor Lawsuits 8

9. Quality Matters • OCC 4th Q 2008 Metrics: only 42% of 2008 mods reduced payments, 27% unchanged; 32% increased. (Other findings are similar) • Surprise! Mods w/ lower payments fare better. • Credit Suisse, Fitch, OCC 4Q Metrics: Dramatic differences between loan mods that decrease payments and those that do not; greater reductions = greater success • UNC Study: Reduction to affordable payments is key to sustainable loan modification • Early intervention pays off • Credit Suisse: mods at 0-59 delinq. Consistently perform better than those at 60+

10. Obama Refinance Plan • Program Benefit: Current borrowers can refinance into lower rate loans • Eligibility • Owner-occupied property • Owned or Insured by Fannie or Freddie (i.e., conforming loan when made) • Current on mortgage payments • Refinance up to 105% of current value (increases Fannie/Freddie 80% limits) • Projections • Admin: 4-5 million refinances • Mark Zandi (Moody’s economy.com): 4-5 million w/ aggregate reduction of $30 billion in mortgage payments

11. Obama Modification Plan: Participation by Servicers • Participation not generally required • Carrots/Sticks to encourage participation • Federal regulators are encouraging licensees to participate • All or Nothing participation (whole portfolio) • Required For … • banks that accept TARP money going forward • Fannie/Freddie portfolio mortgages or MBS pool mortgages guaranteed by Fannie/Freddie

12. Obama Modification Plan: Eligibility • Broad Coverage • Loan balance ≤ $729,750 (higher for 2-4 unit properties) • Modification yields greater return than foreclosure • In default or at imminent risk of default. • Qualified Borrowers • First-lien, owner-occupied • Document income, and sign affidavit of financial hardship • Narrow Window • Loans originated on or before January 1, 2009. • Now thru December 31, 2012 (one mod only per loan) • Servicers have until Dec. 31, 2009 to sign on.

13. Obama Modification Plan: Carrots • Servicer Incentives (after 90-day trial period): • $1,000 for each modified mortgage + $1,000/ year for 3 years if borrower stays current • $500 for modifications made prior to delinquency • $250 + more tba by Treasury for release of 2nd lien • Compensation for foreclosure alternatives (if mod not possible): short sales or deeds-in-lieu • Borrower Incentives:up to $1,000/year for 5 years for current borrowers toward principal • Lender/Investor Incentives: • Interest reduction subsidy • $1,500 payment for pre-default modification delinquency and payments to offset probable losses from home price declines

14. Obama Modification Plan: Standardization, Affordability, Transparency, • NPV Test: Modification returns > Foreclosure Recovery • Reduce Housing Payments to 31% of Income (shared with gov’t from 38%-31%) • Affordability Waterfall • Interest Rate Reduction • Term Extension • Principal Forbearance: Balloon Payments • Principal Reductions: Optional

15. How Does Obama Plan Address Modification Obstacles? • Servicer Capacity and Incentives • Monetary incentives • Standardized processing • Risk of Investor Lawsuits • Industry-wide standards to minimize uncertainty and litigation risk • Direct investor incentives: $ plus insurance against redefault & falling home prices • Stick: judicial modifications • Piggyback Seconds • Incentive payments for release • Legislation Still Needed • Safe harbor • Judicial Modifications

16. Lift the Ban on Judicial Modifications • Incentive to servicers/investors to modify outside bankruptcy • Level Playing Field for Primary Residence Mortgage • Currently, allowed for 2nd homes, yachts, etc., but not for primary residences • Zero cost to taxpayers • Conservatively, could help 800,000 families keep their homes • Narrowly targeted; limited judicial discretion • Structured to prevent attractiveness: can only be the last option for homeowners; BK is “painful”

17. Chairman Bernanke’s Conclusion Federal Reserve Chairman Ben Bernanke: “Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower.” (www.federalreserve.gov/newsevents/press/bcreg/bernankeregz20080714.htm)

18. The “Originate to Distribute” Market Structure: Separating Actions From Consequences 18

19. Perverse Market Incentives “The big demand was not so much on the part of the borrowers as it was on the part of the suppliers who were giving loans which really most people couldn't afford.”(Alan Greenspan to Newsweek, 9/24/2007) “The market is paying me to do a no-income-verification loan more than it is paying me to do the full documentation loans … What would you do?”(CEO of Ownit Mortgage to The New York Times, 1/26/2007). Why would lenders make unsustainable loans? “Because investors continued to buy the loans.” (Mortgage Bankers Ass’n Chief Economist to CNN Money.com, 2/20/2008) 19

20. 2008 HOEPA Regs:A Good Start; More is Needed Requires ability to pay, limits prepayment penalties, requires escrow Other important improvements regarding appraisal, advertising, servicing, early GFE Applies only to subprime loans Not Payment Option Arms Not Interest-Only Loans Does not ban Yield Spread Premiums Takes effect October 2009 20

21. Mortgage Reform Legislation Pending in House of Representatives(HR 1728) • Pros • Narrower scope of “qualified mortgages” subject to safe harbor presumptions • Strong tenant protections • Legal aid funding • Cons • Failure to eliminate perverse market incentives • Weak provisions (steering, YSP, PPP, duties); • Limited remedies • cure requirement only • credit risk retention insufficient replacement for strong provisions • Still no accountability for Wall Street • Preemption!

22. Regulatory Reform Enforcement of existing rules by existing agencies Change in structure to avoid capture, regulator race to the bottom Consider one agency for consumer protection (pros and cons) Stop OCC, OTS interference with state consumer protection 22

23. State Level Action • Foreclosure prevention legislation: Maryland is a leader • Mortgage origination laws: protect from federal undermining • Resources: How to maintain at a time of budget crisis? • Other?

24. Contact Julia Gordon Senior Policy Counsel Center for Responsible Lending Julia.Gordon@responsiblelending.org 202-349-1878 www.responsiblelending.org