Federal Initiatives to Assist Homeowners Facing Foreclosure - Term Paper Example

Federal Initiatives to Assist Homeowners Facing Foreclosure Abstract. The paper starts by outlining some background information regarding the foreclosure crisis. Here the paper focuses on some of the major causes of the foreclosure crisis. It also in this regard outlines the basic foreclosure process. The paper goes ahead to identify and discuss some of the initiatives undertaken by the federal government to address the rising number of foreclosures. Some of the measures discussed in the paper include Making Home Available Program, Hardest Hit Funds, and Emergency Homeowners Loan Program among others. It also scrutinizes the current state of the foreclosure crisis and debates regarding the foreclosure crisis like the inadequacy of the measures to meet the need of homeowners and finally gives an overall conclusion to the matter. Background information Causes of foreclosures Foreclosure refers to formal legal proceedings initiated by a mortgage lender against a homeowner after the homeowner has missed a certain number of payments on his or her mortgage; when the foreclosure process is complete, the homeowners lose ownership of the home which is either repossessed by the lender or alternatively sold at an auction to repay the outstanding debt. The current rise in the number of foreclosures can be attributed to several factors; the declining housing prices, changes in household circumstances and the growth in subprime and non-traditional loans Philadelphia, PA (2011). As far as the housing prices are concerned, studies have shown that home equity is one of the factors contributing to foreclosure. According to the studies, owners with little or no equity have lower incentives to hold onto their property especially in the face of economic shocks and therefore make it difficult if not impossible to stay at par with their payments. In the case of changing household circumstances, several factors can be attributed to the increasing number of foreclosures. These factors include loss of employment, illness or change in the family structure due to divorce. A family that expected to maintain a constant income that would enable it service the mortgage loans would be left to face the threat of foreclosure once the source of income is paralyzed by the loss of employment or death of the breadwinner. On the other hand, unexpected medical bills strains the homeowners’ ability to make the monthly repayment. This might lead to a foreclosure. Finally, homeowners with subprime and non-traditional loans are also vulnerable to foreclosures. This is basically due to the manner in which their loans have been structured. As compared to prime loans, these loans started out with higher interests and targets mostly borrowers with weaker credit scores. The foreclosure process Although foreclosure laws vary from state to state, the basic sequence of events is similar nationwide. Most mortgages require borrowers to make repayment to a loan service on a regular basis mostly on a monthly basis. When the borrower delays to make the repayment for fifteen day, he or she may be charged a fee by the loan servicer. When the delayed period reaches thirty days, the mortgage is considered to be the default and the service files a Default Notice and then sends a letter to the borrower informing him or her that the loan is in default and the measure he or she can take to make the loan current. When the payments are late for 90 days and no arrangements have been made with the lender, the latter initiates a legal process forcing the sale of property. This stage is referred to as foreclosure petition, Mayer, Neil, Peter A. Tatian, Kenneth Temkin and Charles A (2009). Despite the number of federally-supported programs meant to prevent homeowners from foreclosure, the number of such scenario has risen over the recent past. A number of analysts attributed this to the poor design of such programs and also the lack of commitment by the treasury to see the implementation and well running of these programs. According to them those homeowners who expected such programs to help them out of the situation found themselves in worse situations than they would have been supposing the programs were not there. Foreclosure prevention initiatives There are several programs that were implemented by the federal government in an effort to prevent foreclosure. These included; Making Home Available program (MHA) This program was announced in February 2009 by president Obama with an aim to assist homeowners who had problems in making their mortgage payment avoid foreclosure. The MHA program consists of three main parts and its key objectives were to allow homeowners with mortgages owned or guaranteed by Fannie Mae or Freddie Mac16 to refinance them into favorable terms. This was by lowering their monthly mortgage payments into rates that are more affordable. Hardest hit funds This was announced by president Barrack Obama in February 2010 with an objective of making up around 1.5 million dollars available to the Housing Finance Agencies (HFA) of five states that had experienced the hardest declines in home prices. The funds come from the Troubled Assets Relief Program (TARP) funds that the treasury set aside for the Home Affordable Modification Program (HAMP). The funds therefore had to be used in ways complying with the Emergence Economy Stabilization Act of 2008. The implication is that the funds should be used by eligible financial institutions and for purposes allowed by the above Act. The funds were released in rounds and in the first round, the countries that benefited from the funds included; Michigan, Nevada, Florida, California and Arizona. On the second round released in March 2010, the funds were supposed to be used by countries whose large percentage of their population lived in economic distress or those that were hardly hit by unemployment. The countries that benefited from the second round of Hardest Hit funds were; North and South Carolina, Oregon, Ohio and Rhode Island, Melanca Clark & Maggie Barron (2009) . FHA Short Refinance Program The Federal Housing Administration (FHA) Short Refinance Program was announced by the Federal Administration in March 2010. According to the program, certain homeowners who owe more than their homes may be worth are able to refinance into a new FHA-insured mortgages for an amount that is basically lower than the home’s current value. Home owners need to be current on their payment for them to qualify for this program. To add onto this, the balance on the initial mortgage must have been reduced by 10% at least. Emergency Homeowners Loan program This is a program that was meant to administer short loans to mortgage owners who had experienced a decline in their income which may have resulted from unemployment, medical emergency or underemployment in order to enable them make their mortgage payment. This program was actually the result of efforts by the Dodd-Frank Wall Street Reform and Consumer Protection Act of including $ 1 billion for Housing and Urban Development (HUD) to administer the program. The program was administered through two approaches. The first, the state housing finance agencies that operated a similar program as the above could use the EHLP funds to run their existing programs. In the second approach, housing counselling organizations that were part of the Neighbor Works network took the applications for the program and performed other administrative and outreach programs. Foreclosure Counseling Funding for Neighbor Works America This is another initiative by the federal government aimed at reducing the number of foreclosures. The idea here was to appropriate more funds for housing counseling. As earlier explained, one of the major causes of foreclosures is the lack of adequate information regarding the structure of mortgages by borrowers. The Congress therefore found it important to appropriate funds for foreclosure mitigation counseling which is administered by Neighbor Works America which, a non-profit organization created by the Congress in 1978. This organization traditionally provides housing counselling to homebuyers and homeowners through the networks of its organization. It also trains other non-profit housing counselling organizations in foreclosure counselling. Neighbor Works America receives funds through The Consolidated Appropriations Act, 2008 (P.L. 110-161) which it distributes to the other organizations. For effective distribution of the funds for foreclosure counselling, Neighbor Works America has set up the National Foreclosure Mitigation Counseling Program (NFMCP). It then allocates funds to competitive organizations but with a key focus on areas with high default and foreclosure rates on subprime mortgages. The Housing and Economic Recovery Act of 2008 (P.L.110-289) also provided additional funds, precisely $180 million for Neighbor Works to distribute through the NFMCP to other organizations for the provision of legal assistance to homeowners facing delinquency or foreclosure. Current situation The number of foreclosures in the United States (US) has continued to rise over the years. According to a new report from RealtyTrac, foreclosure filings climbed in 75% of the nation's metro areas during the first half of 2010. At a time when the Obama administration believes that we are "turning the corner", things just seem to get even worse. Some parts of the country continue to be a total disaster as far as real estates are concerned, Jakabovics, Andrew and Alon Cohen (2010). Areas like Florida led to the crisis with nine of the top 20 metro foreclosure rates countrywide in the first semester of 2010. For those who hold onto the view that the economy of U.S is improving, they should stop and consider the irony posed by the rising number of foreclosures in major cities like Chicago. In fact, according to RealityTrac, the foreclosure filings in Chicago have shot up by around 23% over the past few years and the truth of the matter is that the crisis has not only hit these cities but it’s actually a national crisis. According to the Mortgage Bankers Association, in a recent report, more than 10% of all homeowners in U.S with mortgage plans missed at least one mortgage payment the period between January and March 2010. By May the same year, banks had repossessed around 269,962 U.S. homes which was a new all-time record. From the above statistics which is just but a highlight of the actual situation of foreclosures, it is evident that the measures that have been laid down so far to address the issue have failed to meet expectations. Debates regarding the foreclosure crisis There has been a lot measures put in place to curb the rising number of foreclosures and from a distance their manifesto seems promising. It’s however sad to point out that from recent analysis, the number of foreclosures has shot up rather than reduced. The implication is that the measures taken so far have not adequately addressed the issue. Although the blame has been redirected to the rising number of unemployment cases from the initial structure of mortgages that did not favor borrowers, the fact remains that unemployment has been there since the start and the structure of the programs should have been made after careful analysis of such situation and even after considering the future expected trends in the causes of the crisis. One concern raised towards these programs is the promise of accountability when in the real sense there is no adequate measures put in place to guarantee this. According to Congresswoman Maxine Waters (D-Calif.), "The only thing worse than no accountability for the banks is for regulators to create the illusion of accountability while putting no enforcement behind the efforts,"the structure of most programs has not taken keen interest to monitor accountability. Lack of or poor accountability leads to poor performance. Another weakness regarding the measure taken so far in regards to the foreclosure crisis is the fact that most of the programs are meant to help those homeowners that have fallen behind on their mortgages but they do not consider those homeowners who struggle to keep in pace with their mortgages. On the other hand, it has been argued that some borrowers get the issue over their heads particularly by going for loans that they know they cannot keep up with. They then turn to these programs for help. There has been efforts for these programs to reach out for the category of homeowners struggling to keep in pace with their loans and also exclude homeowners who provide false information. However these efforts needs keen follow up to ensure accountability. As if this is not enough, the major initiatives towards addressing this issue surround modification of the terms of mortgages. However, opponents argue that changing such terms in a retroactive manner sets a precedent for future mortgage lending. They argue that if lenders will be forced to change the terms of the mortgages in the future, they will be discouraged and what will follow is that they will either not offer loans in the future or if they will offer, they will do it at exorbitant interest rates to counter the increased risks of failing to be paid in full. Going to specific initiatives, one of the highly criticized initiatives is the loan modification initiative. This is basically one of the parts of the MHA program. Initially, the program was projected to have the ability to help more than four million homeowners in the U.S. However, with two years of its existence, only 500,000 Americans with houses in foreclosure were able to benefit from the program. Most critics of the loan modification program cited several causes for its failure. The main cause is the ownership of the authority to modify mortgages. Over the recent years, lenders have adopted a practice of packaging mortgages into securities and selling them to investors. This practice is referred to as securitization and in cases where mortgages are involved; they are referred to as mortgage-backed securities. In such a practice, several parties are involved including the servicer, the lender andthe subject to contracts with investors which limit the extent of activities that the servicers can undertake. The resulting question is therefore who has the authority to make a loan modification. In some cases loan modification can result into higher losses to the investors than foreclosure. The problem is even worse in streamlined programs whereby several loan modifications are made at once. Such questions as how many such loans would have ended up in foreclosure would need to be answered before establishing the cost effectiveness of the loan modification and therefore makes it difficult to determine whether or not wholesale loan modifications favors investors. A partial solution to this problem would include provision of safe harbor for servicers. The Helping Families Save Their Homes Act of 2009 provides a safe harbor for servicers who modify mortgages in accordance with the Making Home available (MHA) program. However critics hold the opinion that this safe harbor infringes the right of investors and may even encourage them to modify loans that have no trouble as long as this benefits them. To add onto this, another challenge facing the loan modification program is the increased number of delinquencies and foreclosure cases underway. Servicers and lenders have a limited number of employees to address the problems of the troubled borrowers. To add onto this, working out individual loan modifications can overwhelm the number of staff available to carry out the task. One possible solution for this situation is initiating streamlined plans that modify all loans that meet particular criteria using a formula. However, as stated earlier, dealing with streamlined plans is risky and the result is a high likelihood of running into contractual issues between the servicers and investors. The structure of the servicers’ compensation provides incentives to pursue foreclosures rather than modify the loans. Finally, mortgage servicers are entitled with the primary responsibility for making decision that concern modification of loans or initiation of the foreclosure process. According to the contracts made by mortgage holders and investors that govern the servicers’ action, the latter are required to act in a manner that favors the interest of the entity which the servicers represent. Servicers have an incentive to service mortgages to the interest of the investors to attract continued business. Recently the Federal Housing Finance Agency (FHFA) and HUD announced a joint initiative to consider the alternative services compensation structure but the problem is that any changes will not be implemented before 2012. Conclusion A lot of programs have been laid down to address the issue of homeowner’s foreclosures. It however evident that the measures have failed to meet the expectation. The number of foreclosures has been on the rise over the past few years. The causes of the increased foreclosures are rather dynamic because initially the major cause was the structure of mortgages but according to the recent statics, the major cause of late is increased unemployment. There is therefore need for the stakeholders involved in the structuring and administration of these programs to go an extra mile to ensure that the program addresses the rising issues like the increased unemployment. To be effective, these programs need to be structured with the view of the future trends and above all, there should be an accountable administration and necessary follow up. References Cohen, Alon. Foreclosure Mediation Going Forward: States Need to Expand Their Programs if The Federal Government Steps Back. Washington, D.C.: Center for American Progress, 2011. Jakabovics, Andrew and Alon Cohen, Now We’re Talking: A Look at Current State-Based Foreclosure Mediation Programs and How to Bring Them to Scale, Washington, D.C.: Center for American Progress, 2010. Jakabovics, Andrew and Alon Cohen, It’s Time We Talked: Mandatory Mediation in the Foreclosure Process, Washington, D.C.: Center for American Progress, 2009. Available at http://www.americanprogress.org/issues/2009/06/time_we_talked.html. Mayer, Neil, Peter A. Tatian, Kenneth Temkin and Charles A. Calhoun, National Foreclosure Mitigation Counseling Program Evaluation: Preliminary Analysis of Program Effects, Washington, D.C.: The Urban Institute, 2009. Melanca Clark & Maggie Barron, Foreclosures: A Crisis in Legal Representation, New York, NY: Brennan Center for Justice, 2009. Philadelphia, PA: The Reinvestment Fund of the Philadelphia Residential Mortgage Foreclosure Diversion Program, 2011. . Read More