House Financial Services Committee Chairman Barney Frank on Thursday announced new legislation that represents Capitol Hill's latest attempt to stem a significant rise in mortgage foreclosures. Under the proposed plan, the Federal Housing Administration would receive $300 billion -- $150 billion over each of the next two years -- to insure and guarantee refinanced mortgages that have been significantly written down by mortgage holders and lenders.
The bill establishes terms for what it calls "homeownership retention mortgages," otherwise called short-refis by most in the industry. Lenders and investors would be required to write off principal for first mortgages while second lienholders would likely be extinguished entirely under the terms of Frank's plan.
The tentative bill outlines a very complex set of requirements surrounding who can get a "retention mortgage" and who can not.
In general, however, borrowers must be underwater enough that a write-down in principal to a first mortgage is required, and must also qualify for the FHA-insured short-refi under traditional circumstances -- that is, at market rate, full doc, fixed-rate only, debt-to-income under 40 percent. Further, the monthly payment borrowers would receive under the "retention mortgage" would need to be less than their existing mortgage payment.
Borrowers obtaining a "retention mortgage" would also see the government put a soft second lien on the property, in order to establish a 3 percent "exit fee" if the borrower sells or refinances the home. Further, the second lien would establish a scaled "shared profits" model if the borrower manages to sell or refinance within five years.
Under the terms outlined by the bill, existing lenders would receive no more than 85 percent of a property's currently-appraised value as payment in full for their existing lien position.
But it's second liens that would appear to be the most pressing issue here, in spite of the fact that many lenders have begun reserving for losses on seconds at 100 percent. Tanta at the Calculated Risk blog opines
The draft bill says that "The Secretary (of HUD) may take such actions as may be necessary and appropriate to facilitate coordination between the holders of the existing senior mortgage and any existing subordinate mortgage to comply with the requirements." It doesn't say what necessary actions might be needed to force second lien holders to roll over and die--threats? bullying? shunning at cocktail parties?--but that's likely to be a sticking point given current second lien holder behavior.
Industry sources that scanned the proposal have said that while the bill makes a good effort, there are likely to be issues with borrowers qualifying. And one source wondered if borrowers would go for it.
"We're already seeing borrowers walk away," said one source, who manages a loss mitigation department at a national lender. "Would borrowers choose to stay in exchange for giving up much of the potential for future profits off of their investment, based on what could end up being only a nominal decrease in monthly cash outlay? I don't know."