Mortgage Loan Modification Program

On Feb. 18, 2009 the U.S. Treasury Department expanded on Treasury Secretary Geithner's initial announcement regarding loan modifications. The expanded proposal is called the Homeowner Affordability and Stability Plan (the "HASP") designed to (i) drive down mortgage rates; (ii) commit $50 billion to prevent avoidable foreclosures; (iii) establish loan modification guidelines based on industry standard best practices; (iv) require all Plan recipients to participate in foreclosure mitigation plans; and (v) build flexibility into the FHA and Hope for Homeowners to enable loan modification for a greater number of borrowers. The Treasury plans to use some of the resources already authorized under EESA to fund this program.

The HASP has three key components. The first component involves providing low-cost refinancing for up to 5 million responsible homeowners to make their mortgages more affordable. This refinancing initiative is designed to help borrowers with conforming loans whose loan-to-value ratio exceeds 80 percent and extends up to 105 percent. The second component of the plan is to support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac (the "GSEs"). The Treasury Department plans to do this by: (i) increasing its Preferred Stock Purchase Agreements to $200 billion from their current levels of $100 billion in each of the GSEs; (ii) purchasing the GSEs mortgage-backed securities; (iii) increasing the size of the GSEs retained mortgage portfolio by $50 billion to a total of $900 billion; and (iv) working with the GSEs to support state housing finance agencies. The third and final component of the HASP is the creation of a $75 billion Homeowner Stability Initiative (the "HSI").

The HSI is designed to reach responsible homeowners who are struggling to afford their current mortgage payments. The HSI will not provide aid to speculators or house flippers; it will only be available for owner-occupied homes or for jumbo mortgage loans. The HSI will include: (i) funds to support loan modifications; (ii) incentives for loan servicers and mortgage holders who modify loans; (iii) incentives to encourage borrowers to stay current (in the nature of annual $1000 payments to reduce principal, up to $5000); (iv) incentives to encourage lenders and borrowers to modify "at-risk" loans before the borrower falls behind; (v) a partial guarantee insurance fund of up to $10 billion to protect lenders from declines in home prices on mortgages modified under the program; (vi) the development of uniform mortgage modification guidelines; (vii) strong oversight, mandatory reporting and quarterly meetings of Treasury, the FDIC, the Federal Reserve and HUD to monitor performance; (viii) support of legislation permitting judicial "cram down" modifications of home mortgages for borrowers during bankruptcy; (ix) $1.5 billion in relocation and other forms of assistance to renters displaced by foreclosure and $2 billion in neighborhood stabilization funds; and (x) improvement in the flexibility of FHA programs, including Hope for Homeowners, to modify and refinance at-risk borrowers.

The HSI does not impose a foreclosure moratorium, and the HSI states that short sales and deeds in lieu should be considered in lieu of foreclosure. The proposed guidelines state that (a) all recipients of future Plan funds must "participate in foreclosure mitigation plans" similar to those proposed by Treasury, (b) Fannie Mae and Freddie Mac will use the guidelines for loans they own or guarantee, and (c) the guidelines will apply to loans "owned or serviced by" insured financial institutions regulated by the OCC, OTC, FDIC, Federal Reserve or the NCUA. The guidelines also state that financial institutions receiving Plan assistance in the future will be required to implement loan modification plans "consistent with" the guidelines.