"Repeal-But-Don't-Replace" - Ending Foreclosure Programs

On Friday, March 4, 2011, we informed you of HUD's notice to reinstate the Emergency Homeowners' Loan Program (EHLP), effective April 4, 2011. EHLP provides emergency relief to homeowners experiencing temporary involuntary loss of employment or underemployment resulting in a substantial reduction in income due to adverse economic conditions, and who consequently are financially unable to make full mortgage payments.

However, on March 3, 2011, virtually coinciding with HUD's Federal Register notice about its interim rule to reinstate EHLP, the House Financial Services Committee approved bills to terminate both the FHA Refinance Program and the Emergency Mortgage Relief Program.

In Congressional Newspeak, these two bills are the "Emergency Mortgage Relief Program Termination Act" (HR 836), and the "FHA Refinance Program Termination Act" (HR 830).

"Ineffective Foreclosure Programs"

Under the rubric Committee Votes To End Failed And Ineffective Foreclosure Programs, the Committee issued a Press Release late in the day on Thursday, March 3, 2011, about the termination bills.

The Committee believes that the elimination of these two programs -- the FHA Refinance Program and the Emergency Mortgage Relief Program -- provides $9 billion in savings.

Emergency Mortgage Relief - Committee's View

The Emergency Homeowner Relief Program provides loans to unemployed borrowers for a period of 12 months, with a possible 12 month extension. These loans increase the amount of the borrower's indebtedness, so a borrower who is unable to pay back either the original amount of principal or the additional loans made under the program will be worse off in the long run. Those borrowers derive no benefit from the program, and the government will suffer losses from their eventual defaults.

The Obama Administration, in its FY 2012 budget proposal, estimates the program to have an almost 98 percent subsidy rate. 

This means for every $1 spent, the government will lose 98 cents. Also, HUD regulations set up a process where the bridge loan can be forgiven over a five-year period.

FHA Refinance Program - Committee's View

The FHA Refinance Program, announced in March 2010 by the Obama Administration, modifies underwater loans into the FHA program.

Although more than $8 billion in TARP funds have been obligated for the FHA Refinance Program, only $50 million has been disbursed and only 40 applicants have been refinanced.

Push-Back

Carolyn Maloney (D-NY) introduced an amendment to HR 830   requiring 500,000 additional underwater mortgages to be refinanced by the Federal Housing Administration before the refinance program is terminated.

Mrs. Maloney stated that "nationally, 2.3 million mortgages are underwater, or 22.5% of all outstanding mortgages. If we can help 500,000 of those, we have made an enormous difference in the lives of people who are struggling to keep their homes and make their mortgage payments each month."

Maxine Waters (D-CA) in a Press Release ("Congresswoman Waters Blasts Republicans for Voting to Dismantle Programs that Help Homeowners Avoid Foreclosure") stated that:

"Republicans voted to terminate the Federal Housing Administration (FHA) Short Refinance program. Under the program, investors agree to write down at least 10 percent on the borrower's mortgage.  In exchange, the borrower is refinanced into an FHA loan.  Borrowers must be current on their mortgage, and federal funds are only spent in the event of a borrower default.

The program is an important option to have available for borrowers and numerous institutions, including Wells Fargo and GMAC/Ally, have recently agreed to participate in the program.

Republicans also voted to end the Emergency Homeowners Relief Program, which provides low-cost loans to unemployed homeowners to help them pay their mortgage. It is based on a highly successful program in Pennsylvania, which has helped 42,700 people since 1983. Congresswoman Waters was instrumental in getting this program included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010."

Mrs. Waters concluded her remarks with these words: 

"This is just part one of the Republican assault on homeowners and working-class people.  The same attitude that led Speaker Boehner to say 'so-be-it,' in response to news that the Republican budget would eliminate jobs, is fueling the Republicans' 'repeal-but-don't-replace' agenda on foreclosure assistance."

What's Next?

This week, the Committee will take up plans to terminate two other government foreclosure programs:

• Home Affordable Modification Program (HAMP)

• Neighborhood Stabilization Program (NSP).

In Congressional Newspeak, these termination bills are, respectively:

• The HAMP Termination Act of 2011 (HR 839)
• NSP Termination Act (HR 861)

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Committee Votes To End Failed And Ineffective Foreclosure Programs
House Committee on Financial Services, Press Release, 3/3/11
FHA Refinance Program Termination Act
HR 830 (2/28/11-3/3/11)
Emergency Mortgage Relief Program Termination Act
HR 836 (2/28/11-3/3/11)

HUD: Reinstates Emergency Relief

HUD is implementing an interim rule that reinstates, with certain modifications, regulations that it formerly published to serve as the framework by which emergency relief may be provided to homeowners experiencing temporary involuntary loss of employment or underemployment resulting in a substantial reduction in income due to adverse economic conditions, and who consequently are financially unable to make full mortgage payments. 

These regulations were promulgated following enactment of the Emergency Homeowners' Relief Act of 1975. This 1975 statute provided standby authority to the Secretary to insure or make loans to homeowners to defray mortgage expenses, so as to prevent widespread mortgage foreclosures and distress sales of homes resulting from a homeowner's substantial reduction income. 

Although the 1975 regulations were quickly put in place, they were not utilized, and HUD eventually removed the regulations from the Code of Federal Regulations in 1995.

Dodd-Frank reauthorized the 1975 statute, with certain amendments, and made $1 billion available for this 1975 program during Fiscal Year (FY) 2011. Accordingly, HUD is reinstating the regulations for the program, under the title of "Emergency Homeowners' Loan Program" (EHLP) with such modifications as necessary to mirror the statutory changes to the Emergency Homeowners' Relief Act of 1975 made by Dodd-Frank.

Effective: April 4, 2011.
Comment Deadline: May 3, 2011.

Outline

1) Clarifies that the principal residence of the homeowner for which the homeowner seeks relief to prevent foreclosure may be a condominium, a cooperative, or a manufactured home.

2) Includes the list of eligible institutions for which HUD is authorized to provide insurance for emergency mortgage relief loans and advances of credit as provided in section 105 of the Emergency Homeowners' Relief Act. (The list of these institutions was not revised by the Dodd-Frank Act but was omitted from the 1975 regulations.

3) Provides that an eligible homeowner must have a total annual income (as defined in these regulations, and hereafter referred to as "income") that is equal to, or less than, 120 percent the area median income (AMI), as determined by HUD and adjusted for household size. (HUD defines AMI in Sec. 2700.5 of the rule.)

4) Provides that an eligible homeowner must have incurred a substantial reduction of income, as a result of involuntary loss of employment or underemployment, that is at least 15 percent lower than the income the homeowner had prior to loss of employment or underemployment.

5) Requires, consistent with the statute, that the aggregate amount of assistance to an eligible homeowner cannot exceed $50,000.

6) Provides that eligible homeowners may receive assistance for up to 12 months, in accordance with criteria established by HUD, and that such assistance may be extended once for up to 12 additional months, or may receive assistance in an amount up to the statutory ceiling of $50,000, whichever occurs first. (NOTE: the Federal Register, which reactivates the program for FY 2011, provides for eligible homeowners to receive assistance for up to 24 months, or up to the statutory ceiling amount of $50,000. Given the duration of high unemployment, HUD has determined that so long as eligibility requirements are maintained, HUD will provide the maximum period of 24 months of homeowner assistance at the outset.)

7) Provides, as did the 1975 regulations, that emergency assistance may be provided only if the homeowner has a back-end ratio or debt-to-income (DTI) below 55 percent (principal, interest, taxes, insurance, revolving and fixed installment debt divided by total monthly income). (For this calculation, the homeowner's income will be measured at the pre-Event level.) Homeowners with second mortgage debt or equity lines of credit may qualify for emergency assistance if the homeowner's DTI is within the program's 55 percent limit.

8) Includes monitoring requirements to ensure that the homeowner remains eligible for the emergency assistance after such assistance has commenced, and also specifies the conditions under which emergency assistance to the homeowner will be terminated.    

9) Adds a declining balance, nonrecourse, zero interest, subordinate secured loan, with a term of up to 7 years, as a type of repayment mechanism for emergency mortgage relief payments.

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Emergency Homeowners' Loan Program (EHLP)
Interim rule, HUD, FR 76/43
March 4, 2011