Sunday, October 26, 2008

A Round-Up of Non-Bankruptcy Mortgage Relief

Many Miami and Broward homeowners are in a position that their real estate has fallen 30 to 50 percent or more in value. This puts them in a situation that the amount owed on their mortgage debt is close to double what the home may be worth now or in the near future. The value of many homes in South Florida may be further depressed than in other parts of the United States due to the costs of real property insurance (including hurricane insurance), real property taxes, deferred maintenance from recent hurricanes, and the burdens of condominium associations.

The media reports that many of the federal programs, including the "Hope for Homeowners" foreclosure prevention program have not been as widely used by homeowners as anticipated. Indeed, Fox News reports today that only 83 [sic] homeowners are under consideration by HUD for this program as of close of business today!! That report though is difficult to square with the report on today that "Hope Now members "helped" 212,000 borrowers stay in their homes in September, "a new record and an increase of 12% from August." A trade publication Default Servicing News ( reports even more boldly that Hope Now has prevented nearly 2.5 million foreclosures. Just three more media claims and we'll have six impossible things even before breakfast. A little bit confusing to say the least. Perhaps Fox is referring to homeowners actually using HUD's program whereas CNN is reporting on persons "helped" by Hope Now mortgage companies in any manner, including non-HUD plan modifications. There has been some indication that some of the "help" being obtained from Hope Now members is simply an agreement to put the mortgage arrearage "at the back end" of the mortgage without a modification of the mortgage interest rate.

The New York Times reports that one reason for the apparent lack of interest in HUD's new program is that hedge funds are warning that they may take action against mortgage companies that participate in government-backed plans to modify delinquent loans in a manner that may undercut the hedge funds' interests.

Under the "Hope for Homeowners" program, borrowers apparently need the cooperation of their existing mortgage company as the program will only provide loans equal to 90 percent of a home's current appraised value. Many mortgage companies would apparently prefer foreclosure than to offer a homeowner a loan modification including a write-down of the mortgage balance. Some homeowners are apparently also leery of a program that would require the homeowner to share their future appreciation with the federal government.

The media does though report that there is some promise that the protocols of mortgage modifications being developed by Indymac and the FDIC may be widely implemented and adopted as models by other mortgage companies. One protocol being widely touted is that a successful mortgage modification should be based on the premise that the homeowner's monthly mortgage payment, including principal, interest, taxes and insurance, should not be more than 38% of the household's gross income ("debt to income ratio"). Modifications would be made to the mortgage payment to achieve this 38% figure. The media reports that Bank of America is using a more generous figure of 34%. Despite the promise of the Indymac progams, the LA Times reports that the public's response to Indymac's program has been disappointing.

Some homeowners though question whether a mortgage modification would be worthwhile if it merely includes a reduction of mortgage payment and not a reduction of principal as the homeowner would not be able to sell the property for the indefinite future as the amount owed is far in excess of the value of the real estate.

In the meanwhile, the widely anticipated bankruptcy amendments, The Helping Families Save Their Homes in Bankruptcy Amendment of 2008, that would provide the Bankruptcy Courts the power to modify mortgages secured only by principal residences has not yet been passed by Congress. Some sources in the media point to action on the proposed bankruptcy amendments in November or the next Congress. Law Professor and Blogger Jonathan Lipson advocates the position that the fairest and most efficient way to deal with the distressed mortgage would be through such an amendment to the bankruptcy code. Professor Lipson also asserts that the proposal for the government to buy mortgages would socialize the losses rather than placing them with the lenders who made the bad deals in the first place.

Other advocates for the bankruptcy code amendments assert that this legislation would not significantly raise the cost of mortgage credit or disrupt secondary markets. They assert that there is no reason to believe that the costs of mortgage credit would rise as the cost of foreclosure to lenders is much greater than that associated with Chapter 13 bankruptcy.