EXECUTIVE ACTIONS TO PREVENT AVOIDABLE FORECLOSURES AND BOOST
THE ECONOMY
Servicers should be required to make cost effective loan modifications and these should include principal reductions. When a loan modification will produce a greater or equal return for an investor than foreclosure, loan servicers should be required to make the loan modification. Modifications should include reduction of principal in first liens, modification or extinguishment of second liens, and reductions in interest rate for the life of the loan based on the homeowners’ debts and necessary expenses as well as their income. Failure by a servicer to provide a required loan modification should be a defense to foreclosure for the affected homeowner. In addition, bankruptcy reform would provide critical relief to homeowners and help clear the housing market, and it should be included in any legislation dealing with foreclosures.
Fannie Mae and Freddie Mac must improve their loan modifications. Fannie Mae and Freddie Mac (the GSEs), now in conservatorship and supported by taxpayers, should prevent unnecessary foreclosures- to protect both taxpayers and homeowners. Industry research shows that principal reductions produce the best long-term returns for the investors and the taxpayers even though they require the recognition of loan losses now on the GSE books. The GSEs should not be permitted to elevate short-term concerns about their balance sheets by refusing to make principal reductions that will result in long-term advantages. The Federal Housing Finance Agency (FHFA) should require both GSEs to adopt and enforce all of the reforms set out in this memo.
HUD, VA, and other government housing programs should enforce their homeowner protection rules, especially those related to mandatory loss mitigation. These government loan programs have rules requiring servicers to try to modify loans before proceeding to foreclosure, but they are not well followed or enforced. These rules should be clarified, strengthened, and rigorously enforced.
End the ‘dual tracks’ of loss mitigation and foreclosure. Currently, companies that service loans and process loan modifications typically continue with foreclosure proceedings at the same time that homeowners are applying for and being considered for loan modifications. These parallel tracks confuse the homeowner, add the cost of the foreclosure work to the homeowner’s debt, and result in foreclosures being wrongfully completed even when the homeowner has applied for or even received a loan modification. Experience has shown that regulatory and programmatic requirements barring foreclosure sales against homeowners in this situation have failed to provide adequate protection. Consequently, if a homeowner has requested a loan modification or other alternative to foreclosure, no foreclosure process should be started or, if the homeowner is already in foreclosure, the foreclosure should not advance while that modification request is reviewed and processed. While several regulators and banks have indicated they are beginning to change aspects of this practice, it is important that it be changed fully and industry-wide. Investor agreements generally provide significant leeway for such action.
Unemployed homeowners need up to 12 months to catch up. HAMP currently requires that mortgage companies provide a minimum of three months of payment relief for unemployed
homeowners. Given the typical length of current unemployment, three months is not enough time for many homeowners to find a new job. This mandatory period should be increased to 12 months, with more permitted if the servicer and investors agree to do so, which the agencies have the authority to do.
Homeowners need a single case manager or point of contact for their modification requests.
Servicers often lose paperwork, make inconsistent requests, and give conflicting information to homeowners. This confusion could be greatly reduced by having a single case manager responsible for each homeowner’s case. Servicers should also be required to have a contact available to resolve disputes (such as missing paperwork) with greater urgency and accountability. Allowing servicers to develop their own approaches to customer service has clearly failed to provide adequate results.
Those who are denied loan modifications should be given an understandable and full explanation as well as the right of appeal to a neutral third party. Homeowners who are turned down for loan modifications often are not given reasons for the denial and they now have no right to appeal the denial. Homeowners should be provided with a full and clear explanation of why they are being denied modifications (whether inside of HAMP or outside of it) including written documentation of any investor-related restrictions. An appeal to an independent third party should be provided, perhaps through an Office of the Homeowner Advocate at Treasury or another agency, which can be set up without Congressional approval. In addition, the Administration should request that Congress fund the foreclosure prevention legal assistance program authorized by the Dodd-Frank Act.
Trial modifications should convert to permanent modifications automatically and homeowners should not be harmed by trial modifications. Homeowners who receive trial modifications and make their payments are still being put through additional red tape that blocks permanent modifications. Under HAMP and any other loan modification program using trial modifications, once a borrower with a verified-income trial modification has made three consecutive, on-time payments, they should automatically obtain a permanent modification. Homeowners who make payments but are denied final modifications should be given appropriate options to catch up on their mortgages without penalty.
The Administration should ensure that assistance for struggling homeowners facing foreclosure is provided quickly and effectively. The Administration should speed implementation of the Emergency Homeowner Loan Program, including completing guidelines and monitoring its operation to ensure that the funds are spent prior to the September 30, 2011, deadline. The Administration also should carefully monitor the Hardest Hit Funds to be sure they are spent efficiently to stop foreclosures and that access to the programs is not unreasonably restrictive.