Mixed Reviews on Report of New JPMorgan Chase Foreclosure Assistance Program

Various media report today that JP Morgan Chase has announced new efforts to help homeowners avoid foreclosure. CNNMoney.com reported that "JPMorgan Chase unveiled a bold new foreclosure prevention program" while Forbes characterizes this bit to help as merely a "little one." Chase purports that it expects to help 400,000 families avoid foreclosure by addressing $70 billion of loans. Another media report states that Chase plans to modify "$110 billion" of mortgages. The media reports that Chase's new program is in the wake of its acceptance of $25 billion in cash infusion from the government within the past two week. But a New York Times article quotes a Chase official that this new program is "not an act of charity or a response to government pressure". Chase did not reveal how much money it plans to spend in this new program. FDIC chairman Sheila Bair called Chase's new plan "a welcome development."

Significantly, Chase announced that it will not institute foreclosure on struggling homeowners for 90 days while it implements the new program and sets up 24 regional counseling centers.

The various articles though note that Chase's new program will apply only to loans owned directly by the bank in distinction to those merely serviced by the bank. Apparently of the $1.5 trillion in mortgages Chase "controls", nearly 80% are owned by investors with only 20% as bank holdings. Chase though apparently announced that it will attempt to obtain authority from its "investors" to apply this foreclosure prevention plan to their mortgage loans. But in what may be quite an understatement, the Chase spokesperson noted that "this is very complicated." Mortgage servicers such as Chase may face liability to the investors if it reduces the mortgages without the investors' approval. There also may be tax constraints under the "REMIC" provisions of the Internal Revenue Code.

The articles state that one of the goals of Chase's new program is to eliminate the negative amortization loans it services that were inherited from Washington Mutual Bank and EMC. These negative amortization loans include option adjustable rate mortgage or "pay-option ARMS." It is reported that the modification to be offered to these so called "toxic" mortgages include conversion to 30-year fixed loans or conversion to 10 year interest-only loans with principal deferment,with an aspect of loan forgiveness.

CNNMoney.com also notes that Chase's program is similar to that offered by Bank of America to the troubled Countrywide loans it acquired. Reportedly Bank of America is reducing monthly mortgage payments to 34% of the borrower's gross income in order to made them affordable to homeowners.

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 CNN.com 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 (DSNews.com) 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.

Senate Report on Proposed Bankruptcy Legislation

The Senate Committee on the Judiciary published its report on the proposed Helping Families Save their Homes in Bankruptcy Act of 2008 (S. 2136). The proposed act includes authority to grant Bankruptcy Judges the authority to modify mortgages on principal residences. Although the act was in early versions of the recently passed $700 billion bailout bill, it did not survive. There is some indication that the act may be reintroduced in the next Congress.

As was reported in the media, the Helping Families Save Their Homes in Bankruptcy Act of 2008 was
HELPING FAMILIES SAVE THEIR HOMES IN BANKRUPTCY
ACT OF 2008
SEPTEMBER 26 (legislative day, SEPTEMBER 17), 2008.—Ordered to be printed
Mr. LEAHY, from the Committee on the Judiciary,
submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany S. 2136]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to which was referred the bill
(S. 2136), to address the treatment of primary mortgages in bankruptcy,
and for other purposes, having considered the same, reports
favorably thereon, with an amendment, and recommends that the
bill, as amended, do pass.
CONTENTS
Page
I. Background and Purpose of the Helping Families Save Their Homes
in Bankruptcy Act of 2008 ......................................................................... 2
II. History of the Bill and Committee Consideration ....................................... 7
III. Section-by-Section Summary of the Bill ...................................................... 9
IV. Congressional Budget Office Cost Estimate ................................................ 13
V. Regulatory Impact Statement ....................................................................... 16
VI. Conclusion ...................................................................................................... 16
VII. Minority Views of Senators Specter, Hatch, Grassley, Kyl, Brownback,
Cornyn and Coburn .................................................................................... 17
VIII. Changes to Existing Law Made by the Bill, as Reported ........................... 23
VerDate Aug 31 2005 08:48 Oct 02, 2008 Jkt 069010 PO 00000 Frm 00001 Fmt 6659 Sfmt 6646 E:\HR\OC\SR514.XXX SR514 erowe on PROD1PC63 with HEARING
2
1 See The Looming Foreclosure Crisis: How To Help Families Save Their Homes, Hearing before
the S. Comm. on the Judiciary, 110th Cong. (December 5, 2007) (prepared statement of
Mark Zandi, Chief Economist and Co-Founder, Moody’s Economy.com) (‘‘I expect approximately
2.8 million mortgage loan defaults (the first step in the foreclosure process) in 2008 and 2009.
Of these, 1.9 million homeowners will go through the entire foreclosure process and ultimately
lose their homes’’).
2 See Edmund Andrews, Relief for Homeowners Is Given to a Relative Few, The New York
Times, March 4, 2008 (‘‘With housing prices falling, analysts estimate that about 30 percent of
all subprime loans written in 2005 and 2006 are for more than the current sales value of the
homes that secure them’’).
3 John Christoffersen, U.S. Housing Slump May Exceed Depression: Shiller, Associated Press,
April 22, 2008.
4 Neil Irwin, IMF Puts Cost of Crisis Near $1 Trillion, The Washington Post, April 9, 2008.
5 Id.
6 Center for Responsible Lending Issue Brief, Updated Projections of Subprime Foreclosures
in the United States and Their Impact on Home Values and Communities, August, 2008, available
at http://www.responsiblelending.org/pdfs/updated-foreclosure-and-spillover-brief-8-18.pdf.
7 Chairman Ben S. Bernanke, Chairman of the Board of Governors of the Federal Reserve System,
Reducing Preventable Mortgage Foreclosures: Speech at the Independent Community
Bankers of America Annual Convention, Orlando, Florida, March 4, 2008, available at http://
www.federalreserve.gov/newsevents/speech/bernanke20080304a.htm (‘‘ * * * principal reductions
that restore some equity for the homeowner may be a relatively more effective means of
avoiding delinquency and foreclosure [than interest rate reductions]).’’
I. BACKGROUND AND PURPOSE OF THE HELPING FAMILIES SAVE
THEIR HOMES IN BANKRUPTCY ACT OF 2008
As the number of foreclosures in the United States continues to
rise to historic levels—threatening the economy overall and the
families at risk in particular—further congressional action is required
to help as many families as possible save their homes.
Risky lending practices in the subprime mortgage market have
put nearly two million families in danger of losing their homes to
foreclosure before the end of 2009.1 These families are typically either
trapped in ‘‘exploding’’ subprime loans they can no longer afford
due to upward adjustments in mortgage interest rates, or are
saddled with mortgage debts that far exceed the value of their
homes due to rapidly declining housing markets.2 The problem is
expected to continue to worsen throughout 2008 and 2009; noted
economist Robert Schiller, who pioneered the Case-Schiller housing
index, has said that housing prices could fall further than the 30%
reduction experienced during the Depression of the 1930s.3
The foreclosure crisis is threatening the overall economy at the
same time that it strikes every neighborhood in which a foreclosure
occurs. According to the International Monetary Fund, $565 billion
will be lost on investments in U.S. home mortgages.4 The IMF also
predicts that the overall credit crisis, which was instigated by and
continues to be fueled by the rising number of foreclosures, will
cause $1 trillion in worldwide losses.5 And in each neighborhood in
which any foreclosures occur, homeowners who have never missed
a mortgage payment will still lose $8,667 on average in the value
of their homes; these 40.6 million homeowners who do not face foreclosure
are expected to lose over $352 billion in value from their
primary store of wealth.6
To respond to this crisis, it is imperative to craft policies that
will avoid home foreclosures. Reducing the principal owed on mortgages
to a level that the homeowners can afford to repay—without