Affordable Housing Finance

HOUSING POLICY

Washington Update

Foreclosure Crisis Continues to Be Major Concern

AFFORDABLE HOUSING FINANCE • March 2009

BY BARRY G. JACOBS

The foreclosure crisis remains a major concern as Congress and the Obama administration look to provide relief for struggling homeowners.

One source of aid is likely to be the second $350 billion in Troubled Asset Relief Program (TARP) funds. While the Bush administration focused on recapitalizing banks, President Barack Obama and the expanded Democratic majority in Congress are aiming to use a significant chunk for foreclosure relief.

Efforts also are being made to boost activity in the Federal Housing Administration’s HOPE for Homeowners refinancing program. Enacted as part of the Housing and Economic Recovery Act, the program was supposed to provide help for as many as 400,000 troubled households, but it has gotten off to a slow start.

The House has passed legislation (H.R. 384) sponsored by Financial Services Committee Chairman Barney Frank (D-Mass.) that would direct the Treasury Department to allocate at least $40 billion of TARP funds for foreclosure relief, with a target of $100 billion. Treasury would have to use a minimum of $20 billion to develop a foreclosure mitigation program in consultation with the Department of Housing and Urban Development (HUD) and the Federal Deposit Insurance Corp.

The bill would require Treasury to maximize assistance for homeowners and renters in connection with the handling of any mortgages and mortgagerelated assets it acquires.

The mortgage servicer bill (H.R. 788) would provide a safe harbor for securitized mortgage servicers who might otherwise be liable for contract violations for modifying the underlying loans, provided that a default has occurred or is likely and the servicer believes investors will do better through a modification than foreclosure. The safe harbor would be limited to mortgages on owneroccupied properties and to modifications initiated before Jan. 1, 2012.

The HOPE for Homeowners bill (H.R. 787) would raise the basic loan-tovalue (LTV) limit from 90 percent to 93 percent, eliminate the upfront mortgage insurance premium, reduce the annual premium to a range of 55 to 75 basis points, and eliminate the government’s participation in any future appreciation in the property. The government would continue to share in any profit attributable to the equity created by the HOPE for Homeowners refinancing.

Separately, the outgoing administration issued regulations to increase the LTV limit to 96.5 percent if the new mortgage payment and total recurring monthly payments won’t exceed 31 percent and 43 percent, respectively.

To encourage secondary lien holders to consent to a refinancing, the revised rules will allow them to get an upfront payment rather than wait for a share in any future appreciation. If the combined LTV ratio on a property is more than 135 percent, a subordinate lien holder can choose an upfront payment of 3 percent of the unpaid existing loan balance instead of a prospective future payment of 9 percent. If the combined LTV ratio is no higher than 135 percent, the options are 4 percent and 12 percent.

Democrats also are pursuing efforts to modify the bankruptcy laws to allow courts to modify loans backed by debtors’ principal residence. The House Judiciary Committee has approved a cramdown bill (H.R. 200) that would let a bankruptcy court modify the terms of a loan originated prior to the date of enactment of the legislation.

Both Fannie Mae and Freddie Mac have announced relief for tenants in single-family homes that they acquire through foreclosure, allowing them to continue to rent their units. Freddie Mac is also extending this rental option to owner-occupants. Under the Fannie Mae plan, tenants can remain in their homes by paying market rent under a month-to-month lease. For properties acquired by Freddie Mac, tenants will be offered a month-to-month lease at the lesser of market rent or their preforeclosure rent, while owner-occupants will pay market rent.

The two government-sponsored enterprises also disclosed how badly they themselves have been hurt. Freddie Mac, which has already received a $13.8 billion capital infusion from the Treasury Department to avoid being forced into receivership, said it will need an additional $30 billion to $35 billion. Fannie Mae said it will require $11 billion to $16 billion of Treasury aid.

Upfront income verification

HUD has issued final upfront income verification regulations for public and assisted housing that will require public housing authorities (PHAs) and multifamily owners and managers to use HUD’s enterprise income verification (EIV) system to verify income and employment in tenant recertifications and reexaminations.

The EIV system must be used as a third-party source to verify income and employment for participants in public housing, the tenant-based Sec. 8 voucher program, and project-based rental assistance programs.

The regulations generally go into effect March 30, but use of the EIV system won’t be mandatory for project owners and managers until Sept. 30.

Under the regulations, in determining annual income, PHAs, owners, and managers can use either actual income currently being received, projected forward for 12 months, or, when there are problems with current income data, actual income received during the previous 12 months.

The rules also require families participating in or applying for housing assistance to submit a Social Security number for each family member, regardless of age.

Applicants can’t be admitted to a housing program until they provide this information, though they can remain on the waiting list.

Barry G. Jacobs is editor of Housing and Development Reporter, the nation’s premier source for in-depth, factual coverage of all aspects of affordable housing and community development. The two-part publication includes informed reports and insightful analyses in “HDR Current Developments,” and an up-to-date compilation of essential documents in the “HDR Reference Files.” Jacobs is also the author of the annually updated HDR Handbook of Housing and Development Law. For more information, call (800) 723-8077.