Rep. Waters Introduces Legislation for Systematic Approach to Loan Modifications

""Rep. Maxine Waters"":http://www.house.gov/waters/ (D-California), chairwoman of the subcommittee on Housing and Community Opportunity and a member of the Financial Services Committee, introduced the Systematic Foreclosure Prevention and Mortgage Modification Act of 2008 (H.R. 7326) to lawmakers on Capitol Hill last week.
The bill is designed to dramatically reduce the number of foreclosures by establishing a systematic approach to modifying troubled mortgages, Waters' office explained. It is the first piece of legislation to incorporate ""Federal Deposit Insurance Corporation"":http://www.fdic.gov (FDIC) Chairman Sheila Bair's broad-based approach to a structured loan modification plan and government guarantees to protect lenders and servicers from a second default after a mortgage has been modified.
""The foreclosure crisis continues to spiral out of control,"" Waters said, ""and our current programs for dealing with this crisis are simply not getting the job done.""
Rep. Waters proposes paying mortgage servicers $1,000 for each modification and having the government share up to 50 percent of any loss if a modified loan redefaults. However, if the modification does not lower the homeowner's monthly payment by at least 10 percent, the mortgage would be excluded from loss sharing, and the government's loss share drops to 20 percent for loan-to-value ratios above 100 percent.
The cornerstone of the plan is the requirement that participating servicers must systematically review all loans in their portfolios. Each loan will be subjected to a net present value test to determine whether it is more beneficial to modify or to foreclose. The new legislation would mandate that loans passing the test must be modified.
According to ""RealtyTrac"":http://www.realtytrac.com, foreclosures increased more than 71 percent in the third quarter of 2008 compared to a year ago. The ""Mortgage Bankers Association"":http://www.mbaa.org reported last week that a record 1.35 million homes are in foreclosure. And, Moody’s ""Economy.com"":http://www.economy.com estimates that in the next 2 years, more than 7 million American homeowners will default on their mortgages, with 4.3 million ultimately losing their homes.
Meanwhile, the ""Hope Now Alliance"":http://www.hopenow.com continues to offer more repayment plans instead of loan modifications, the ""Hope for Homeowners"":http://portal.hud.gov/portal/pagex_pageid=73,7601299&_dad=portal&_schema=PORTAL (H4H) program is undersubscribed by servicers, and the government's Troubled Asset Relief Program (TARP) has not been used for mortgage relief as was originally prescribed, Waters' office said in a ""press statement"":http://www.house.gov/apps/list/press/ca35_waters/PR081210_foreclosure_help.html.
""These foreclosures are devastating our communities. Unless immediate action is taken to assist the homeowners struggling with these unaffordable and unsustainable mortgages, it will take years for our communities to recover from this crisis,"" Waters said. ""This is why I support FDIC Chairman Sheila Bair’s plan to systematically reduce foreclosures. Unfortunately, the Bush Administration has failed to implement her plan on a wide scale. My legislation takes Chairman Bair’s plan and gives it the force of law.""
""Servicers have been telling us -- and we have been telling them -- that it is cheaper to modify than it is to foreclose. Even so, foreclosure rates have continued to climb,"" Waters explained. ""This legislation will finally get the servicers to realize that loan modification benefits the investors as well as the homeowner.""
The FDIC plan has been successfully implemented at ""IndyMac Federal Bank"":http://www.fdic.gov/consumers/loans/modification/indymac.html. And, as of mid-November, over 5,000 IndyMac borrowers have avoided foreclosure with more affordable mortgages because of the plan. If such an approach were applied nationally, 2.2 million mortgages could be modified, according to Waters.
""This systematic approach is precisely what we need to keep more families in their homes,"" Waters said. ""Unfortunately, while [Treasury] Secretary Paulson recently required Citigroup to implement the FDIC loan modification program as a condition for receiving TARP funds, he refuses to implement the plan nationwide.""
Many lawmakers have expressed concern that the Bush Administration's economic recovery initiatives have not addressed foreclosures and the housing crisis - what is widely accepted as the root cause of the country's financial meltdown - and Democratic leaders especially want more to be done to help delinquent homeowners. ""Rep. Barney Frank"":http://www.house.gov/frank/ (D-Massachusetts), head of the House Financial Services Committee, said last week that any requests from the Treasury Department for more of the bailout fund must include foreclosure prevention programs, and he has repeatedly voiced his disappointment that the treasury secretary refuses to use TARP for foreclosure assistance.
Waters' introduction of H.R. 7326 shows that lawmakers have decided to take matters into their own hands when it comes to the dwindling American dream for homeowners. The new bill states that funding for the systematic loan modification program would come from the money ""made available to the Secretary of the Treasury under ... the Emergency Economic Stabilization Act of 2008.""
""America’s homeowners are every bit as deserving of a bailout as the fat cats on Wall Street who created this crisis,"" Waters said. ""If my legislation is enacted, America’s homeowners will finally receive the help they have been asking for.""
However, according to a _""CNN"":http://www.money.cnn.com_ report, any action on Waters' bill is unlikely during the current lame duck congressional session. It will likely have to be reintroduced when the new Congress takes office next year.