Preserving Homeownership: Progress Needed to Prevent Foreclosures
I. Introduction Chairman Dodd, Ranking Member Shelby, and members of the Committee, thank you for inviting me to testify today regarding the barriers encountered by homeowners attempting to access the Making Home Affordable program and the Hope for Homeowners program.
I am an attorney, currently of counsel to the National Consumer Law Center (NCLC).In my work at NCLC I provide training and support to hundreds of attorneys representing homeowners from all across the country and consequently have heard many, many reports of the difficulties encountered by advocates and homeowners attempting to obtain sustainable loan modifications. For nearly 13 years prior to joining NCLC, I represented lowincome homeowners at Land of Lincoln Legal Assistance Foundation in East St. Louis, Illinois. In that capacity, I became intimately familiar with the difficulties in arranging a loan modification, even when it was clearly in the investor’s best interests.
I testify here today on behalf of the National Consumer Law Center’s lowincome clients. On a daily basis, NCLC provides legal and technical assistance on consumer law issues to legal services, government and private attorneys representing lowincome consumers across the country. I also testify here today on behalf of the National Association of Consumer Advocates.
We are facing in this country a foreclosure tsunami, which threatens to destabilize our entire economy, devastate entire communities, and destroy millions of families. Largescale, sustainable modifications are widely recognized as an essential component of restoring economic health to our country and hope to our homeowners.
There are three major federal programs designed to prevent foreclosures and preserve homeownership: Hope for Homeowners, the Making Home Affordable refinance program, and the Making Home Affordable modification program, or the Home Affordable Modification Program. My comments will focus on the modification prong of the Making Home Affordable program. Far more of the homeowners facing foreclosure are eligible for modification under the Home Affordable Modification Program than for refinance under either Hope for Homeowners or the refinance prong of Making Home Affordable. Recent changes to both programs should increase eligibility and may increase participation. Still, restrictions on both programs are likely to continue to limit their reach.
Both Hope for Homeowners and the refinance prong of Making Home Affordable are designed to offer some relief to homeowners who owe more than their homes are worth. This is an important goal and an essential component of any solution to the foreclosure crisis. As described in Chairman Dodd’s letter of July 10, 2009, Hope for Homeowners, in particular, could play an important role in moving us forward by mandating principal reductions. We remain concerned, however, that neither program effectively eliminates negative equity. The refinance prong of Making Home Affordable permits the refinancing of excess debt and so may permit homeowners to lower interest rates. Absent market appreciation, however, it does not reduce the negative equity. Although Hope for Homeowners mandates principal reductions, many mortgage holders and servicers continue to be unwilling to agree to this writedown as the price for participation in the program, even with the possibility of an increased share in future appreciation.Nor is it clear that even the recent improvements to the Hope for Homeowners second lien program will be sufficient to remove second liens in any significant number.
The recent improvements to FHA and RHS are also beyond the scope of my testimony. We would like nonetheless to take this opportunity to congratulate Congress and the Administration on the important steps forward in these programs. In addition to improving Hope for Homeowners, S. 896 also increased the ability of homeowners with FHA and RHS loans to access partial claims, a special form of principal forbearance. This, too, is an important step to increase the longterm affordability of mortgages for many of our most vulnerable homeowners. Having negotiated partial claims with FHA servicers on behalf of lowincome homeowners, I personally know how important the partial claim option can be to preserving homeownership. We at NCLC and NACA applaud Congress and the Administration for their efforts to expand the modification options available under the governmentinsured programs: FHA, RHS, and VA.
The Home Affordable Modification Program (HAMP) announced by President Obama’s administration on March 4, 2009, is a laudable attempt to overcome long standing reluctance by servicers to perform large numbers of sustainable loan modifications. HAMP seeks to change the dynamic that leads servicers to refuse even loan modifications that would be in the investors’ best interests by providing both servicers and investors with payments to support successful loan modifications. Several months into the Home Affordable Modification Program (HAMP), however, homeowners and their advocates report that the program is not providing a sufficient number of loan modifications to homeowners, the modifications offered often do not meet the guidelines of the program, and the program itself still presents serious barriers to mass loan modifications.
HAMP, despite its lofty goals, has not yet been able to contain the foreclosure tsunami. To date, implementation of the program by servicers has been slow and sporadic. The Administration’s efforts to hold servicers accountable are a welcome and necessary step forward. Further steps to reform HAMP and ensure servicer compliance are needed if the program is to reach its goal of reducing foreclosures. Particularly problematic is the lack of any mechanism to ensure that homeowners are, when appropriate, offered a loan modification prior to foreclosure sale. A time line should be set to evaluate whether HAMP, along with other existing programs, can sufficiently address foreclosures. If it becomes clear they can not, more stringent measures, as discussed below, should be adopted. The structure of the servicing industry makes it unlikely that existing measures will be adequate; currently available information confirms that prognosis.
A. Problems with Servicers’ Implementation of HAMP Plague Homeowners Seeking Loan Modifications.
- Participating servicers violate the HAMP guidelines:
- Servicers still require waivers.
- Some participating servicers offer noncompliant loan modifications.
- Some participating servicers refuse to offer HAMP modifications.
- Servicers charge fees to homeowners for the modification.
- Servicers are continuing to initiate foreclosures and sell homes at foreclosure sales while the HAMP review is pending.
- Servicer staffing and training still lag behind what is needed.
- Homeowners and counselors report waits of months to hear back on review for a trial modification, followed by very short time frames to return documents.
- Staff of participating servicers continue to display alarming ignorance of HAMP.
- Nonparticipating servicers continue to represent themselves as participating in HAMP.
- Lack of transparency and accountability is resulting in summary denials and other unreasonable acts by servicers.
B. Certain HAMP Policies Must Be Changed to Provide Sustainable Modifications and Save Communities.
- Transparency must be improved.
- The Net Present Value model for qualifying homeowners must be available to the public.
- The layers of documents governing HAMP, the guidelines, the Supplemental Directives, the various FAQ’s, and the servicer contracts, should be consolidated, reconciled, and clarified.
- Participating subsidiaries must be clearly identified.
- Mechanisms for enforcement and compliance should be adopted.
- All foreclosure proceedings must be stopped upon the initiation of a HAMP review, not just at the point before sale.
- Homeowners should be provided with an independent review process when denied a loan modification.
- Homeowners should have access to an ombudsman to address complaints about the process.
- Denials based in part on a borrower’s credit score should be accompanied by an adverse action notice under the Fair Credit Reporting Act.
- The HAMP guidelines should be adjusted to provide more meaningful relief to homeowners without reducing their existing rights.
- Homeowners need principal reductions, not forbearance.
- Homeowners suffering an involuntary drop in income should be eligible for a second HAMP loan modification.
- Homeowners in bankruptcy should be provided clear access to the HAMP program.
- Mortgages should remain assumable as between spouses, children, and other persons with a homestead interest in the property.
- Fair lending principles must be ensured throughout the HAMP process.
- HAMP application procedures should better recognize and lessen the impact of exigent circumstances.
- The trial modification program should be further formalized and clarified, such that homeowners receive assurances of the terms of the permanent modification and homeowners are not put into default on their loans if they are current at the onset of the trial modification.
- The final modification agreement should make clear that the homeowners do not waive any rights nor are required to reaffirm the debt in order to enter into the modification.
- The second lien program should be further developed to promote coordination with first lien modifications; servicers should be required to participate in both programs.
- Data collection and reporting should provide broad, detailed information in order to support the best HAMP outcomes.
How much better would the modification process be if congress took just a few of her suggestions and made the changes?
I will be breaking down her testimony over the next couple of months so be sure to come back and get the information.
Kev
