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Preserving Homeownership: Foreclosure
Prevention Initiatives
Katie Jones
Analyst in Housing Policy
December 11, 2009
Congressional Research Service
7-5700
www.crs.gov
R40210
CRS Report for Congress
P
repared for Members and Committees of Congress
c11173008
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Preserving Homeownership: Foreclosure Prevention Initiatives
Summary
The foreclosure rate in the United States has been rising rapidly since the middle of 2006. Losing
a home to foreclosure can hurt homeowners in many ways; for example, homeowners who have
been through a foreclosure may have difficulty finding a new place to live or obtaining a loan in
the future. Furthermore, concentrated foreclosures can drag down nearby home prices, and large
numbers of abandoned properties can negatively affect communities. Finally, the increase in
foreclosures may destabilize the housing market, which could in turn negatively impact the
economy as a whole.
There is a broad consensus that there are many negative consequences associated with rising
foreclosure rates. Both Congress and the Bush and Obama Administrations have initiated efforts
aimed at preventing further increases in foreclosures and helping more families preserve
homeownership. On February 18, 2009, President Obama announced the Making Home
Affordable program, which aims to modify the loans of borrowers who are in danger of default or
foreclosure. Other foreclosure prevention initiatives established prior to the creation of the
Obama Administration’s foreclosure prevention plan include the expired FHASecure program and
the ongoing Hope for Homeowners program, both of which allowed troubled borrowers to
refinance their loans into new mortgages backed by the Federal Housing Administration (FHA);
Fannie Mae’s and Freddie Mac’s Streamlined Modification Plan, which has since been replaced
by Making Home Affordable; and a program put in place by the Federal Deposit Insurance
Corporation (FDIC) to help troubled borrowers with loans that had been owned by IndyMac Bank
before it was taken over by the FDIC. Several states and localities have initiated their own
foreclosure prevention efforts, as have private companies including Bank of America, JP Morgan
Chase, and Citigroup. A voluntary alliance of mortgage lenders, servicers, investors, and housing
counselors has also formed the HOPE NOW Alliance to reach out to troubled borrowers.
Additional efforts to address foreclosures are included in P.L. 111-22, the Helping Families Save
Their Homes Act of 2009, signed into law by President Obama on May 20, 2009. The law makes
changes to the Hope for Homeowners program and establishes a safe harbor for servicers who
engage in certain loan modifications.
While many observers agree that slowing the pace of foreclosures is an important policy goal,
there are several challenges associated with foreclosure mitigation plans. These challenges
include implementation issues, such as deciding who has the authority to make mortgage
modifications, developing the capacity to complete widespread modifications, and assessing the
possibility that homeowners with modified loans will nevertheless default again in the future.
Other challenges are related to the perception of fairness, the problem of inadvertently providing
incentives for borrowers to default, and the possibility of setting an unwanted precedent for future
mortgage lending.
This report describes the consequences of foreclosure on homeowners, outlines recent foreclosure
prevention plans implemented by the government and private organizations, and discusses the
challenges associated with foreclosure prevention. It will be updated as events warrant.
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Preserving Homeownership: Foreclosure Prevention Initiatives
Contents
Introduction and Background ...................................................................................................... 1
Recent Market Trends ........................................................................................................... 1
Impacts of Foreclosure .......................................................................................................... 3
The Policy Problem............................................................................................................... 3
Why Might a Household Find Itself Facing Foreclosure?....................................................... 4
Changes in Household Circumstances ............................................................................. 4
Mortgage Features .......................................................................................................... 5
Types of Loan Workouts ....................................................................................................... 7
Repayment Plans............................................................................................................. 8
Principal Forbearance...................................................................................................... 8
Principal Write-Downs/Principal Forgiveness.................................................................. 8
Interest Rate Reductions.................................................................................................. 8
Extended Loan Term/Extended Amortization .................................................................. 9
Recent Foreclosure Prevention Initiatives.................................................................................... 9
Making Home Affordable...................................................................................................... 9
Home Affordable Refinance Program............................................................................ 10
Home Affordable Modification Program ....................................................................... 10
Support for Fannie Mae and Freddie Mac...................................................................... 13
Hope for Homeowners ........................................................................................................ 13
Other Government Initiatives .............................................................................................. 14
FHASecure ................................................................................................................... 15
IndyMac Loan Modifications ........................................................................................ 16
Fannie Mae and Freddie Mac ........................................................................................ 17
Federal Reserve ............................................................................................................ 19
Foreclosure Counseling Funding to NeighborWorks America ........................................ 20
Foreclosure Mitigation Efforts Targeted to Servicemembers .......................................... 20
State and Local Initiatives ............................................................................................. 21
Private Initiatives ................................................................................................................ 21
HOPE NOW Alliance ................................................................................................... 21
Bank of America ........................................................................................................... 22
JP Morgan Chase .......................................................................................................... 23
Citigroup ...................................................................................................................... 23
Other Foreclosure Prevention Proposals .................................................................................... 24
Changing Bankruptcy Law.................................................................................................. 24
Foreclosure Moratorium...................................................................................................... 25
Issues and Challenges Associated with Preventing Foreclosures ................................................ 25
Who Has The Authority to Modify Mortgages? ................................................................... 25
Volume of Delinquencies and Foreclosures ......................................................................... 26
Possibility of Re-default ...................................................................................................... 26
Fairness Issues .................................................................................................................... 27
Incentives ........................................................................................................................... 27
Precedent ............................................................................................................................ 28
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Figures
Figure 1. Percentage of Loans in Foreclosure by Type of Loan .................................................... 2
Tables
Table A-1. Features of Selected Programs.................................................................................. 29
Appendixes
Appendix. Comparison of Recent Federal Foreclosure Prevention Initiatives............................. 29
Contacts
Author Contact Information ...................................................................................................... 32
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Preserving Homeownership: Foreclosure Prevention Initiatives
Introduction and Background
The foreclosure rate in the United States has been rising rapidly since around the middle of 2006.
The large increase in home foreclosures since that time has negatively impacted individual
households, local communities, and the economy as a whole. Consequently, an issue before
Congress is whether to use federal resources and authority to help prevent further increases in
home foreclosures and, if so, how to best accomplish this objective. This report details the impact
of foreclosure on homeowners. It also describes recent attempts to preserve homeownership that
have been implemented by the government and private lenders, and briefly outlines current
proposals for further foreclosure prevention activities. It concludes with a discussion of some of
the challenges inherent in designing foreclosure prevention initiatives. This report will be updated
as events warrant.
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.1 When a foreclosure is completed, the homeowner loses his or her home, which is
either repossessed by the lender or sold at auction to repay the outstanding debt. In general, the
term “foreclosure” can refer to the foreclosure process or the completion of a foreclosure. This
report deals primarily with preventing foreclosure completions.
In order for the foreclosure process to begin, two things must happen: a homeowner must fail to
make a certain number of payments on his or her mortgage, and a lender must decide to initiate
foreclosure proceedings rather than pursue other options (such as offering a repayment plan or a
loan modification). A borrower that misses one or more payments is usually referred to as being
delinquent on a loan; when a borrower has missed three or more payments, he or she is generally
considered to be in default. Lenders can choose to begin foreclosure proceedings after a
homeowner defaults on his or her mortgage, although lenders vary in how quickly they begin
foreclosure proceedings after a borrower goes into default. Furthermore, the rules governing
foreclosures, and the length of time the process takes, vary by state.
Recent Market Trends
Home prices rose rapidly throughout some regions of the United States beginning in 2001.
Housing has traditionally been seen as a safe investment that can offer an opportunity for high
returns, and rapidly rising home prices reinforced this view. During this housing “boom,” many
people decided to buy homes or take out second mortgages in order to access their increasing
home equity. Furthermore, rising home prices and low interest rates contributed to a sharp
increase in people refinancing their mortgages; for example, between 2000 and 2003, the number
of refinanced mortgage loans jumped from 2.5 million to over 15 million.2 Around the same time,
subprime lending, which generally refers to making mortgage loans to individuals with credit
scores that are too low to qualify for prime rate mortgages, also began to increase, reaching a
peak between 2004 and 2006. However, beginning in 2006 and 2007, home sales started to
1 For a more detailed discussion of the foreclosure process and the factors that contribute to a lender’s decision to
pursue foreclosure, see CRS Report RL34232, The Process, Data, and Costs of Mortgage Foreclosure, coordinated by
Darryl E. Getter.
2 U.S. Department of Housing and Urban Development, Office of Policy Development and Research, An Analysis of
Mortgage Refinancing, 2001-2003, November 2004, p.1, http://www.huduser.org/Publications/pdf/
MortgageRefinance03.pdf.
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decline, home prices stopped rising and began to fall in many regions, and the rates of
homeowners becoming delinquent on their mortgages or going into foreclosure began to increase.
The percentage of home loans in the foreclosure process in the U.S. has been rising rapidly since
the middle of 2006. Although not all homes in the foreclosure process will end in a foreclosure
completion, an increase in the number of loans in the foreclosure process is generally
accompanied by an increase in the number of homes on which a foreclosure is completed.
According to the Mortgage Bankers Association, an industry group, about 1% of all home loans
were in the foreclosure process in the second quarter of 2006. By the second quarter of 2009, the
rate had quadrupled to over 4%.
The foreclosure rate for subprime loans has always been higher than the foreclosure rate for
prime loans. For example, in the second quarter of 2006, just over 3.5% of subprime loans were
in the foreclosure process compared to less than 0.5% of prime loans. However, both prime and
subprime loans have seen similar increases in the foreclosure rate over the past several quarters.
Like the foreclosure rate for all loans combined, the foreclosure rates for prime and subprime
loans have both more than quadrupled, with the rate of subprime loans in the foreclosure process
increasing to over 15% in Q1 2009 and the rate of prime loans in the foreclosure process
increasing to 3% over the same time period. According to the Congressional Budget Office
(CBO), observers expect the high rate of foreclosures to continue throughout 2009 and beyond.3
Figure 1 illustrates the trend in the rate of mortgages in the foreclosure process over the past
several years.
Figure 1. Percentage of Loans in Foreclosure by Type of Loan
16.00
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_2001
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200
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_2002 3_2
_2003 3_2
_2004 3_2
3 200
Q1
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Q1
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Q1
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Subprime
Source: Figure created by CRS using data from the Mortgage Bankers Association.
3 Statement of Douglas W. Elmendorf, Director, Congressional Budget Office, testimony before the U.S. Congress,
Senate Committee on the Budget, Federal Response to the Housing and Financial Crisis, 111th Cong., 1st sess., January
28, 2009, p. 17, http://cbo.gov/ftpdocs/99xx/doc9971/01-28-FinancialMarkets_Testimony.pdf.
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Notes: The Mortgage Bankers Association (MBA) is one of several organizations that reports delinquency and
foreclosure data, but it does not represent all mortgages. MBA estimates that its data cover about 80% of
outstanding first-lien mortgages on single-family properties.
Impacts of Foreclosure
Losing a home to foreclosure can have a number of negative effects on a household. For many
families, losing a home means losing the household’s largest store of wealth. Furthermore,
foreclosure can negatively impact a borrower’s creditworthiness, making it more difficult for him
or her to buy a home in the future. Finally, losing a home to foreclosure can also mean that a
household loses many of the less tangible benefits of owning a home. Research has shown that
these benefits include increased civic engagement that results from having a stake in the
community, and better health, school, and behavioral outcomes for children.4
Some homeowners might have difficulty finding a place to live after losing their home to
foreclosure. Many will become renters. However, some landlords may be unwilling to rent to
families whose credit has been damaged by a foreclosure, limiting the options open to these
families. There can also be spillover effects from foreclosure on current renters. Renters living in
units facing foreclosure may be required to move, even if they are current on their rent payments.
As more homeowners become renters and as more current renters are displaced when their
landlords face foreclosure, pressure on local rental markets may increase, and more families may
have difficulty finding affordable rental housing. Some observers have also raised the concern
that a large increase in foreclosures could increase homelessness, either because families who lost
their homes have trouble finding new places to live or because the increased demand for rental
housing makes it more difficult for families to find adequate, affordable units.
If foreclosures are concentrated, they can also have negative impacts on communities. Many
foreclosures in a single neighborhood may depress surrounding home values.5 If foreclosed
homes stand vacant for long periods of time, they can attract crime and blight, especially if they
are not well-maintained. Concentrated foreclosures also place pressure on local governments,
which can lose property tax revenue and may have to step in to maintain vacant foreclosed
properties.
The Policy Problem
There is a broad bipartisan consensus that the recent rapid rise in foreclosures is having negative
consequences on households and communities. For example, Representative Spencer Bachus,
Ranking Member of the House Committee on Financial Services, has said that “[i]t is in
everyone’s best interest as a general rule to prevent foreclosures. Foreclosures have a negative
4 For example, see Donald R. Haurin, Toby L. Parcel, and R. Jean Haurin, The Impact of Homeownership on Child
Outcomes, Joint Center for Housing Studies, Harvard University, Low-Income Homeownership Working Paper Series,
October 2001, http://www.jchs.harvard.edu/publications/homeownership/liho01-14.pdf, and Denise DiPasquale and
Edward L. Glaeser, Incentives and Social Capital: Are Homeowners Better Citizens?, National Bureau of Economic
Research, NBER Working Paper 6363, Cambridge, MA, January 1998, http://www.nber.org/papers/w6363.pdf?
new_window=1.
5 For a review of the literature on the impact of foreclosures on nearby house prices, see Kai-yan Lee, Foreclosure’s
Price-Depressing Spillover Effects on Local Properties: A Literature Review, Federal Reserve Bank of Boston,
Community Affairs Discussion Paper, No. 2008-01, September 2008, http://www.bos.frb.org/commdev/pcadp/2008/
pcadp0801.pdf.
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impact not only on families but also on their neighbors, their property value, and on the
community and local government.”6 Senator Chris Dodd, Chairman of the Senate Committee on
Banking, Housing, and Urban Affairs, has described an “overwhelming tide of foreclosures
ravaging our neighborhoods and forcing thousands of American families from their homes.”7
There is less agreement among policymakers about how much the federal government should do
to prevent foreclosures. Proponents of enacting government policies and using government
resources to prevent foreclosures argue that, in addition to being a compassionate response to the
plight of individual homeowners, such action may prevent further damage to home values and
communities that can be caused by concentrated foreclosures. Supporters also suggest that
preventing foreclosures may help stabilize the economy as a whole. Opponents of government
foreclosure prevention programs argue that foreclosure prevention should be worked out between
lenders and borrowers without government interference. Opponents also express concern that
people who do not really need help, or who are not perceived to deserve help, will unfairly take
advantage of government foreclosure prevention programs. They argue that taxpayers’ money
should not be used to help people who can still afford their loans but want to get more favorable
terms, people who may be seeking to pass their losses on to the lender or the taxpayer, or people
who knowingly took on mortgages that they could not afford.
Despite the concerns surrounding foreclosure prevention programs, and disagreement over the
proper role of the government in preserving homeownership, Congress and the executive branch
have both recently taken actions aimed at preventing foreclosures. Many private companies and
state and local governments have also undertaken their own foreclosure prevention efforts. This
report describes why so many households are currently at risk of foreclosure, outlines recent
government and private initiatives to help homeowners remain in their homes, and discusses
some of the challenges inherent in designing successful foreclosure prevention plans.
Why Might a Household Find Itself Facing Foreclosure?
There are many reasons that a household might fall behind on its mortgage payments. Some
borrowers may have simply taken out loans on homes that they could not afford. However, many
homeowners who believed they were acting responsibly when they took out a mortgage
nonetheless find themselves facing foreclosure. The reasons households might have difficulty
making their mortgage payments include changes in personal circumstances, which can be
exacerbated by macroeconomic conditions, and features of the mortgages themselves.
Changes in Household Circumstances
Changes in a household’s circumstances can affect its ability to pay its mortgage. For example, a
number of events can leave a household with a lower income than it anticipated when it bought
its home. Such changes in circumstances can include a lost job, an illness, or a change in family
structure due to divorce or death. Families that expected to maintain a certain level of income
6 Representative Spencer Bachus, “Remarks of Ranking Member Spencer Bachus During Full Committee Hearing on
Loan Modifications,” press release, November 12, 2008, http://bachus.house.gov/index.php?option=com_content&
task=view&id=160&Itemid=104.
7 Senator Chris Dodd, “Dodd Statement on Government Loan Modification Program,” statement, November 11, 2008,
http://dodd.senate.gov/?q=node/4620.
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may struggle to make payments if a household member loses a job or faces a cut in pay, or if a
two-earner household becomes a single-earner household. Unexpected medical bills or other
unforeseen expenses can also make it difficult for a family to stay current on its mortgage.
Furthermore, sometimes a change in circumstances means that a home no longer meets a family’s
needs, and the household needs to sell the home. These changes can include having to relocate for
a job or needing a bigger house to accommodate a new child or an aging parent. Traditionally,
households that needed to move could usually sell their existing homes. However, the recent
decline in home prices in many communities nationwide has left some homeowners
“underwater,” meaning that borrowers owe more on their homes than the houses are worth. This
limits homeowners’ ability to sell their homes if they have to move; many of these families are
effectively trapped in their current homes and mortgages because they cannot afford to sell their
homes at a loss.
The risks presented by changing personal circumstances have always existed for anyone who
took out a loan, but deteriorating macroeconomic conditions, such as falling home prices and
increasing unemployment, have made families especially vulnerable to losing their homes for
such reasons. The fall in home values that has left some homeowners owing more than the value
of their homes not only traps those people in their current homes; it also makes it difficult for
homeowners to sell their homes in order to avoid a foreclosure, and it increases the incentive for
homeowners to walk away from their homes if they can no longer afford their mortgage
payments. Along with the fall in home values, another recent macroeconomic trend has been
increasing unemployment. More households experiencing job loss and the resultant income loss
have made it difficult for many families to keep up with their monthly mortgage payments.
Mortgage Features
Borrowers might also find themselves having difficulty staying current on their loan payments
due in part to features of their mortgages. In the last several years, there has been an increase in
the use of alternative mortgage products whose terms differ significantly from the traditional 30-
year, fixed interest rate mortgage model.8 While borrowers with traditional mortgages are not
immune to delinquency and foreclosure, many of these alternative mortgage features seem to
have increased the risk that a homeowner will have trouble staying current on his or her
mortgage. Many of these loans were structured to have low monthly payments in the early stages
and then adjust to higher monthly payments depending on prevailing market interest rates and/or
the length of time the borrower held the mortgage. Furthermore, many of these mortgage features
made it more difficult for homeowners to quickly build equity in their homes. Some examples of
the features of these alternative mortgage products are listed below.
Adjustable-Rate Mortgages
With an adjustable-rate mortgage (ARM), a borrower’s interest rate can change at predetermined
intervals, often based on changes in an index. The new interest rate can be higher or lower than
the initial interest rate, and monthly payments can also be higher or lower based on both the new
8 For a fuller discussion of these types of mortgage products and their effects, see CRS Report RL33775, Alternative
Mortgages: Causes and Policy Implications of Troubled Mortgage Resets in the Subprime and Alt-A Markets, by
Edward V. Murphy.
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interest rate and any interest rate or payment caps.9 Some ARMs also include an initial low
interest rate known as a teaser rate. After the initial low-interest period ends and the new interest
rate kicks in, the monthly payments that the borrower must make may increase, possibly by a
significant amount.
Adjustable-rate mortgages make economic sense for some borrowers, especially if interest rates
are expected to go down in the future. ARMs can help people own a home sooner than they may
have been able to otherwise, or make sense for borrowers who cannot afford a high loan payment
in the present but expect a significant increase in income in the future that would allow them to
afford higher monthly payments. Furthermore, the interest rate on ARMs tends to follow short-
term interest rates in the economy; if the gap between short-term and long-term rates gets very
wide, it might make sense for borrowers to choose an ARM even if they expect interest rates to
rise in the future. Finally, in markets with rising property values, borrowers with ARMs may be
able to refinance their mortgages to avoid higher interest rates or large increases in monthly
payments. However, if home prices fall, refinancing the mortgage or selling the home to pay off
the debt may not be feasible, and homeowners can find themselves stuck with higher mortgage
payments.
Zero-Downpayment or Low-Downpayment Loans
As the name suggests, zero-downpayment and low-downpayment loans require either no
downpayment or a significantly lower downpayment than has traditionally been required. These
types of loans make it easier for homebuyers who do not have a lot of cash up-front to purchase a
home. This type of loan may be especially useful in areas where home prices are rising more
rapidly than income, because it allows borrowers without enough cash for a large downpayment
to enter markets they could not otherwise afford. However, a low- or no-downpayment loan also
means that families have little or no equity in their homes in the early phases of the mortgage,
making it difficult to sell the home or refinance the mortgage in response to a change in
circumstances if home prices decline. Such loans may also mean that a homeowner takes out a
larger mortgage than he or she would otherwise.
Interest-Only Loans and Negative Amortization Loans
With an interest-only loan, borrowers pay only the interest on a mortgage—but no part of the
principal—for a set period of time. This option increases the homeowner’s monthly payments in
the future, after the interest-only period ends and the principal amortizes. These types of loans
limit a household’s ability to build equity in its home, making it difficult to sell or refinance the
home in response to a change in circumstances if home prices are declining.
With a negative amortization loan, borrowers have the option to pay less than the full amount of
the interest due for a set period of time. The loan “negatively amortizes” as the remaining interest
is added to the outstanding loan balance. Like interest-only loans, this option increases future
monthly mortgage payments when the principal and the balance of the interest amortizes. These
9 Even if the interest rate remains the same or decreases, it is possible for monthly payments to increase if prior
payments were subject to an interest rate cap or a payment cap. This is because unpaid interest that would have accrued
if not for the cap can be added to the principal loan amount, resulting in negative amortization. For more information
on the many variations of adjustable rate mortgages, see The Federal Reserve Board, Consumer Handbook on
Adjustable Rate Mortgages, http://www.federalreserve.gov/pubs/arms/arms_english.htm#drop.
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types of loans can be useful in markets where property values are rising rapidly, because
borrowers can enter the market and then use the equity gained from rising home prices to
refinance into loans with better terms before payments increase. They can also make sense for
borrowers who currently have low incomes but expect a significant increase in income in the
future. However, when home prices stagnate or fall, interest-only loans and negative amortization
loans can leave borrowers with negative equity, making it difficult to refinance or sell the home to
pay the mortgage debt.
Alt-A Loans
Alt-A loans are mortgages that are similar to prime loans, but for one or more reasons do not
qualify for prime interest rates. One example of an Alt-A loan is a low-documentation or no-
documentation loan. These are loans to borrowers with good credit scores but little or no income
or asset documentation. Although no-documentation loans allow for more fraudulent activity on
the part of both borrowers and lenders, they may be useful for borrowers with income that is
difficult to document, such as those who are self-employed or work on commission. Other
examples of Alt-A loans are loans with high loan-to-value ratios or loans to borrowers with credit
scores that are too low for a prime loan but high enough to avoid a subprime loan. In all of these
cases, the borrower is charged a higher interest rate than he or she would be charged with a prime
loan.
Many of these loan features may have played a role in the recent increase in foreclosure rates.
Some homeowners were current on their mortgages before their monthly payments increased due
to interest rate resets or the end of option periods. Some built up little equity in their homes
because they were not paying down the principal balance of their loan or because they had not
made a downpayment. Stagnant or falling home prices in many regions also hampered borrowers’
ability to build equity in their homes. Borrowers without sufficient equity find it difficult to take
advantage of options such as refinancing into a more traditional mortgage if monthly payments
become too high or selling the home if their personal circumstances change.
Types of Loan Workouts
When a household falls behind on its mortgage, there are options that lenders or servicers10 may
be able to employ as an alternative to beginning foreclosure proceedings. Some of these options,
such as a short sale and a deed-in-lieu of foreclosure,11 allow a homeowner to avoid the
foreclosure process but still result in a household losing its home. This section describes methods
10 Mortgage lenders are the organizations that make mortgage loans to individuals. Often, the mortgage is managed by
a separate company known as a servicer; servicers usually have the most contact with the borrower, and are responsible
for actions such as collecting mortgage payments, initiating foreclosures, and communicating with troubled borrowers.
Finally, many mortgages are repackaged into mortgage-backed securities (MBS) that are sold to institutional investors.
Servicers are usually subject to contracts with mortgage lenders and MBS investors that may limit their ability to
undertake loan workouts or modifications; the scope of such contracts and the obligations that servicers must meet vary
widely.
11 In a short sale, a household sells its home for less than the amount it owes on its mortgage, and the lender generally
accepts the proceeds from the sale as payment in full on the mortgage even though it is taking a loss. A deed-in-lieu of
foreclosure refers to the practice of a borrower turning the deed to the house over to the lender, which accepts the deed
as payment of the mortgage debt.
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of avoiding foreclosure that allow homeowners to keep their homes; these options generally take
the form of repayment plans or loan modifications.
Repayment Plans
A repayment plan allows a delinquent borrower to become up-to-date on his or her loan by paying
back the payments he or she has missed, along with any accrued late fees. This is different from a
loan modification, which changes one or more of the terms of the loan (such as the interest rate).
Under a repayment plan, the missed payments and late fees may be paid back after the rest of the
loan is paid off, or they may be added to the existing monthly payments. The first option
increases the time that it will take for a borrower to pay back the loan, but his or her monthly
payments will remain the same. The second option may result in an increase in monthly
payments. Repayment plans may be a good option for homeowners who experienced a temporary
loss of income but are now financially stable. However, since they do not generally make
payments more affordable, repayment plans are unlikely to help homeowners with unaffordable
loans avoid foreclosure in the long term.
Principal Forbearance
Principal forbearance means that a lender or servicer removes part of the principal from the
portion of the loan balance that is subject to interest, thereby lowering borrowers’ monthly
payments by reducing the amount of interest owed. The portion of the principal that is subject to
forbearance still needs to be repaid by the borrower in full, usually after the interest-bearing part
of the loan is paid off or when the home is sold. Because principal forbearance does not actually
change any of the loan terms, it resembles a repayment plan more than a loan modification.
Principal Write-Downs/Principal Forgiveness
A principal write-down is a type of mortgage modification that lowers borrowers’ monthly
payments by forgiving a portion of the loan’s principal balance. The forgiven portion of the
principal never needs to be repaid. Because the borrower now owes less, his or her monthly
payment will be smaller. This option is costly for lenders but can help borrowers achieve
affordable monthly payments, as well as increase the stake borrowers have in their homes and
therefore increase their desire to stay current on the mortgage and avoid foreclosure.12
Interest Rate Reductions
Another form of loan modification is when the lender voluntarily lowers the interest rate on a
mortgage. This is different from a refinance, in which a borrower takes out a new mortgage with a
lower interest rate and uses the proceeds from the new loan to pay off the old loan. Unlike
refinancing, a borrower does not have to pay closing costs or qualify for a new loan to get an
interest rate reduction, which makes interest rate reductions a good option for borrowers who owe
12 Historically, one impediment to principal forgiveness has been that borrowers were required to claim the forgiven
amount as income, and therefore had to pay taxes on that income. Congress recently passed legislation that excludes
mortgage debt forgiven before January 1, 2013 from taxable income. For more information about the tax treatment of
principal forgiveness, see CRS Report RL34212, Analysis of the Tax Exclusion for Canceled Mortgage Debt Income,
by Mark P. Keightley and Erika K. Lunder.
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more on their mortgages than their homes are worth. With an interest rate reduction, the interest
rate can be reduced permanently, or it can be reduced for a period of time before increasing again
to a certain fixed point. Lenders can also freeze interest rates at their current level in order to
avoid impending costly interest rate resets on adjustable rate mortgages. Interest rate
modifications are relatively costly to the lender, but they can be effective at reducing monthly
payments to an affordable level.
Extended Loan Term/Extended Amortization
Another option for lowering monthly mortgage payments is extending the amount of time over
which the loan is paid back. While extending the loan term increases the total cost of the
mortgage for the borrower because more interest will accrue, it allows monthly payments to be
smaller because they are paid over a longer period of time. Most mortgages in the U.S. have an
initial loan term of 25 or 30 years; extending the loan term from 30 to 40 years, for example,
could result in a lower monthly mortgage payment for the borrower.
Recent Foreclosure Prevention Initiatives
The federal government, state and local governments, and private companies have all
implemented a variety of plans to attempt to slow the recent increase in foreclosures. This section
describes a number of recent foreclosure prevention initiatives.
Making Home Affordable
On February 18, 2009, President Obama announced the Making Home Affordable (MHA)
program, aimed at helping homeowners who are having difficulty making their mortgage
payments avoid foreclosure.13 (The program details originally referred to the program as the
Homeowner Affordability and Stability Plan, or HASP. Further program details released on
March 4, 2009, began referring to the plan as Making Home Affordable.) This plan is part of the
Administration’s broader economic recovery strategy, along with the Financial Stability Plan (an
administrative initiative aimed at shoring up the financial system) and the American Recovery
and Reinvestment Act of 2009 (enacted legislation (P.L. 111-5) aimed at stimulating the
economy).14
Making Home Affordable includes three main parts. The first two parts of the plan allow certain
homeowners to refinance or modify their mortgages. The third part of the plan provides
additional financial support to Fannie Mae and Freddie Mac.
13 More information on the Administration’s housing plan can be found at http://www.financialstability.gov/
roadtostability/homeowner.html.
14 For more information on the Financial Stability Plan, see http://www.financialstability.gov/docs/fact-sheet.pdf. For
more information on the American Recovery and Reinvestment Act of 2009, see CRS Report R40537, American
Recovery and Reinvestment Act of 2009 (P.L. 111-5): Summary and Legislative History, by Clinton T. Brass et al.
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Home Affordable Refinance Program
The first part of MHA is the Home Affordable Refinance Program (HARP). HARP allows
homeowners with mortgages owned or guaranteed by Fannie Mae or Freddie Mac to refinance
into loans with more favorable terms even if they owe more than 80% of the value of their homes.
Generally, borrowers who owe more than 80% of the value of their homes have difficulty
refinancing and therefore cannot take advantage of lower interest rates. By allowing borrowers
who owe more than 80% of the value of their homes to refinance their mortgages, the plan is
meant to help qualified borrowers lower their monthly mortgage payments to a level that is more
affordable. Originally, qualified borrowers were eligible to refinance under this program if they
owed up to 105% of the value of their homes. On July 1, 2009, the Administration announced that
it is expanding the program to include borrowers who owe up to 125% of the value of their
homes.
In addition to having a mortgage owned or guaranteed by Fannie Mae or Freddie Mac, a borrower
must have a mortgage on a single-family home, live in the home as his or her primary residence,
and be current on the mortgage payments in order to be eligible for this program. Rather than
targeting homeowners who are behind on their mortgage payments, this piece of the MHA plan
targets homeowners who have kept up with their payments but have lost equity in their homes
due to falling home prices. Borrowers can apply for this part of the plan until June 2010.
The Administration estimates that the refinancing part of Making Home Affordable could help up
to between 4 million and 5 million homeowners. According to a report from the Federal Housing
Finance Agency (FHFA), Fannie Mae and Freddie Mac had refinanced over 116,500 loans with
loan-to-value ratios above 80% as of September 30, 2009.15
Home Affordable Modification Program
The second part of MHA is the Home Affordable Modification Program (HAMP). This part of the
program encourages servicers to provide mortgage modifications for troubled borrowers in order
to reduce the borrowers’ monthly mortgage payments to no more than 31% of their monthly
income. In order to qualify, a borrower must have a mortgage on a single-family residence that
was originated on or before January 1, 2009, must live in the home as his or her primary
residence, and must have an unpaid principal balance on the mortgage that is no greater than the
Fannie Mae/Freddie Mac conforming loan limit in high-cost areas ($729,750 for a one-unit
property). Furthermore, the borrower must currently be paying more than 31% of his or her
income toward mortgage payments, and must be experiencing a financial hardship that makes it
difficult to remain current on the mortgage. Borrowers need not already be delinquent on their
mortgage in order to qualify.
Servicers participating in the modification program will conduct a “net present value test” on
eligible mortgages that compares the expected returns to investors from doing a loan modification
to the expected returns from pursuing a foreclosure. If the expected returns from a loan
modification are greater than those from foreclosure, servicers will reduce borrowers’ payments
to no more than 38% of monthly income, primarily using interest rate reductions but also using
term extensions, principal forbearance, and principal forgiveness as needed. The government will
15 Federal Housing Finance Agency, “Refinance Report: September 2009,” November 2, 2009, available at
http://www.fhfa.gov/webfiles/15153/Sept_Refinance_Final_report_and_release_11_2_09.pdf.
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then match the lender dollar for dollar to reduce borrowers’ payments from a 38% mortgage debt-
to-income ratio (DTI) to a 31% DTI. Servicers can reduce interest rates to as low as 2%. The new
interest rate must remain in place for five years; after five years, if the interest rate is below the
market rate at the time the modification agreement was completed, the interest rate can rise by
one percentage point per year until it reaches that rate. Borrowers must make modified payments
on time during a three-month trial period before the modification is considered complete.
The Home Affordable Modification Program is voluntary, but the government will provide
incentives for participation. Servicers will receive an incentive payment for each successful loan
modification, an additional payment for modifications made for borrowers who are not yet
delinquent, and a “pay for success” payment for up to three years if the borrower remains current
after the modification. The borrower can also receive an incentive payment (in the form of
principal reduction) for up to five years if he or she remains current after the modification is
finalized. Lenders or investors can receive incentive payments for loans modified before a
borrower becomes delinquent. Companies that receive funding through the Troubled Assets
Relief Program (TARP) or the Financial Stability Plan (FSP) after the announcement of MHA
will be required to participate in HAMP.
Since the program’s announcement, the government has announced several additional details.16
These details include the following:
• Second Liens: Many borrowers have second mortgages on their homes. Second
mortgages can cause problems for loan modification programs because (1)
modifying the first lien may not reduce households’ total monthly mortgage
payments to an affordable level if the second mortgage remains unmodified, and
(2) holders of primary mortgages are often hesitant to modify the mortgage if the
second mortgage holder does not agree to re-subordinate the second mortgage to
the first mortgage. In order to address the issue of second liens, the government
will share some of the costs of reducing borrowers’ payments on second
mortgages, and will offer lenders and borrowers smaller “pay for success”
incentive payments for successfully modified second mortgages. In certain
situations, lenders can also choose to extinguish second mortgages in exchange
for a one-time payment from the government.
• Short sales and deeds-in-lieu of foreclosure: When a borrower is minimally
eligible for MHA but does not ultimately qualify for a modification, the
government will offer incentive payments to servicers who use short sales and
deeds-in-lieu of foreclosure as alternatives to foreclosures. Borrowers can also
receive incentive payments to help with relocation expenses when they
successfully complete a short sale or deed-in-lieu of foreclosure. In order to
attempt to streamline the process of short sales and deeds-in-lieu of foreclosure,
the government will also provide standardized documentation and processes for
servicers to use.
16 For more information on the additional Making Home Affordable program details described here, see “Making
Home Affordable Program Update,” April 28, 2009, at http://www.financialstability.gov/docs/
042809SecondLienFactSheet.pdf, and “Making Home Affordable Update: Foreclosure Alternatives and Home Price
Decline Protection Incentives,” May 14, 2009, at http://www.treas.gov/press/releases/docs/05142009FactSheet-
MakingHomesAffordable.pdf.
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• Home Price Decline Protection: To encourage modifications even in markets
where home prices are continuing to fall, lenders or investors will be eligible for
Home Price Decline Protection incentive payments for successful modifications
in areas with declining home prices. The incentive payments will be calculated
according to the home price decline in the quarters prior to the loan modification
in the area where the home is located and the average price of a home in that
area. Total home price decline protection incentive payments will not exceed $10
billion.
• Hope for Homeowners Program: The MHA program will require participating
servicers to screen borrowers for eligibility for the Hope for Homeowners
program (described later in this report) and to use that program for borrowers
who qualify. Servicers who modify loans using Hope for Homeowners, and
lenders who originate new loans under the program, will be eligible for incentive
payments similar to those offered under Making Home Affordable.
HAMP will exist until December 31, 2012. The Administration estimates that HAMP will cost
$75 billion. Of this amount, $50 billion will come from TARP funds and $25 billion will come
from Fannie Mae and Freddie Mac.17
The Administration estimates that HAMP could eventually help up to between 3 million and 4
million homeowners. The Treasury Department is releasing monthly reports detailing the
program’s progress. Currently, these reports include the number of overall trial modifications
made under HAMP, the number of trial modifications made by individual servicers, the number
of trial modifications underway in each state, and the number of trial modifications that have
converted to permanent modifications. According to the November 2009 report, which includes
data through November 26, 2009, over 759,000 trial modifications have begun since the
program’s inception. Of these, over 697,000 are currently active trial modifications, and nearly
31,400 have become permanent modifications.18
Many observers have expressed concern at the low number of trial modifications that have
converted to permanent modifications to date. In order for a modification to become permanent, a
borrower must make all of the trial period payments on time, and must submit all necessary
documentation (such as tax returns and proof of income) to the servicer. On November 30, 2009,
the Administration announced a number of steps that it will take to attempt to facilitate the
conversion of trial modifications to permanent modifications. These steps include increased
reporting requirements and monitoring of servicers, and outreach efforts to borrowers to help
them understand and meet the program’s documentation requirements.19
17 Department of the Treasury, Section 105(a) Troubled Assets Relief Program Report to Congress for the Period
February 1, 2009 to February 28, 2009, p. 1, available at http://www.financialstability.gov/docs/
105CongressionalReports/105aReport_03062009.pdf.
18 U.S. Department of the Treasury, “Making Home Affordable Program: Servicer Performance Report Through
November 2009,” December 10, 2009, available at http://www.financialstability.gov/docs/
MHA%20Public%20121009%20FINAL.PDF.
19 U.S. Department of the Treasury and U.S. Department of Housing and Urban Development, “Obama Administration
Kicks Off Mortgage Modification Conversion Drive,” press release, November 30, 2009, available at http://treas.gov/
press/releases/tg421.htm.
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Support for Fannie Mae and Freddie Mac
The third piece of the Administration’s housing plan provides additional financial support for
Fannie Mae and Freddie Mac in an effort to maintain low mortgage interest rates. The
Department of the Treasury will increase its Preferred Stock Purchase agreements from $100
billion to $200 billion for both Fannie Mae and Freddie Mac, and will increase the size of their
portfolios by $50 billion each. The funding for the increased preferred stock purchases was
authorized by the Housing and Economic Recovery Act of 2008 (P.L. 110-289).
Hope for Homeowners
Congress created the Hope for Homeowners program in the Housing and Economic Recovery Act
of 2008 (P.L. 110-289), which was signed into law on July 30, 2008. The program, which is
voluntary on the part of both borrowers and lenders, offers certain borrowers the ability to
refinance into new mortgages insured by FHA if their lenders agree to certain loan modifications.
The Hope for Homeowners program began on October 1, 2008, and will remain in place until
September 30, 2011. In order to be eligible for the program, borrowers must meet the following
requirements:
• The borrower must have a mortgage that originated on or before January 1, 2008.
• The borrower’s mortgage payments must have been more than 31% of their gross
monthly income as of March 1, 2008.
• The borrower must not own another home.
• The borrower must not have intentionally defaulted on his or her mortgage, and
he or she must not have been convicted of fraud during the last ten years under
either federal or state law.
• The borrower must not have provided false information to obtain the original
mortgage.
Under Hope for Homeowners, the lender agrees to write the mortgage down to a percentage of
the home’s currently appraised value, and the borrower receives a new loan insured by the FHA.
The home must be reappraised by an FHA-approved home appraiser in order to determine its
current value, and the lender absorbs whatever loss results from the write-down. The new
mortgage is a 30-year fixed-rate mortgage with no prepayment penalties, and may not exceed
$550,440. Any second lien-holders are required to release their liens, and homeowners pay
upfront and annual mortgage insurance premiums. When the homeowner sells or refinances the
home, he or she is required to share between 50% and 100% of the proceeds with HUD
depending on the length of time that passes between the time the borrower enters the program and
when he or she sells the home. After one year, 100% of the equity in the home and any home
value appreciation is shared with FHA, while after five years, only 50% is shared with FHA.
Under the original terms of the program, the lender was required to write the loan down to 90%
of the home’s currently appraised value. The upfront and annual mortgage insurance premiums
were set at 3% and 1.5%, respectively, and second lien-holders were compensated for releasing
their liens with a share of any future profit from the home’s eventual sale.
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On November 19, 2008, HUD announced three changes to Hope for Homeowners in order to
simplify the program and encourage participation.20 These changes did the following: (1)
increased the maximum loan-to-value ratio of the new loan to 96.5% of the home’s currently
appraised value, instead of the original 90%, in order to minimize losses to lenders; (2) allowed
lenders to increase the term of the mortgage from 30 to 40 years in order to lower borrowers’
monthly payments; and (3) offered an immediate payment to second lien-holders, instead of a
share in future profits, in return for their agreement to relinquish the lien.
Recent legislative and administrative developments made further attempts to increase
participation in Hope for Homeowners. On May 20, 2009, President Obama signed into law P.L.
111-22, the Helping Families Save Their Homes Act of 2009. This law changes the Hope for
Homeowners program by allowing reductions in both the upfront and annual mortgage insurance
premiums that borrowers pay; allowing servicers to receive incentive payments for each loan they
successfully refinance using Hope for Homeowners; and allowing HUD to reduce its share in any
future home price appreciation and giving HUD the authority to share its stake in the home’s
future appreciation with the original lender or a second lien-holder. The law also places the Hope
for Homeowners program under the control of the Secretary of HUD and limits eligibility for the
program to homeowners whose net worth does not exceed a certain threshold.
The CBO originally estimated that up to 400,000 homeowners could be helped to avoid
foreclosure over the life of the program.21 As of mid-July 2009, the program had received 949
applications and 50 new mortgages had closed.22 Some have suggested that more borrowers and
lenders have not used Hope for Homeowners because the program is too complex. The legislative
and administrative changes described above were intended to address some of the obstacles to
participating in the program.
The Obama Administration has issued guidance for servicers on using Hope for Homeowners
together with the Making Home Affordable program. This guidance requires servicers who are
participating in the Making Home Affordable program to screen borrowers for eligibility for
Hope for Homeowners and to use that program for qualified borrowers. The Administration’s
guidance also offers incentive payments to servicers who make modifications under Hope for
Homeowners, and to lenders who originate new loans under the program.
Other Government Initiatives
In addition to Making Home Affordable and Hope for Homeowners, a number of other programs
have been created by federal, state, and local governments to attempt to stem the rise in
20 The authority to make these changes to Hope for Homeowners was granted in P.L. 110-343, the Emergency
Economic Stabilization Act of 2008. The decision to make the changes was ultimately made by the Board of Hope for
Homeowners, which includes the Secretary of HUD and the Secretary of the Treasury, among others.
21 Congressional Budget Office, Cost Estimate, Federal Housing Finance Regulatory Reform Act of 2008, June 9,
2008, p. 8, http://www.cbo.gov/ftpdocs/93xx/doc9366/Senate_Housing.pdf.
22 U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Preserving Homeownership: Progress
Needed to Prevent Foreclosures, 111th Cong., 1st sess., July 16, 2009, hearing transcript available at
http://www.cq.com/display.do?dockey=/cqonline/prod/data/docs/html/transcripts/congressional/111/
congressionaltranscripts111-000003168396.html@committees&metapub=CQ-CONGTRANSCRIPTS&searchIndex=
0&seqNum=8, and the Federal Housing Administration, FHA Outlook, July 1-15, 2009, available at
http://www.hud.gov/offices/hsg/comp/rpts/ooe/olcurr.pdf. Of the 50 loans that had closed under Hope for Homeowners
as of July 16, 2009, only one had been insured by FHA.
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foreclosures and help more homeowners remain in their homes. Although some of these programs
are now obsolete, many continue to operate. This section describes other recent federal programs
and briefly outlines some state and local foreclosure prevention efforts.
FHASecure
FHASecure was a temporary program announced by the Federal Housing Administration (FHA)
on August 31, 2007, to allow delinquent borrowers with non-FHA adjustable-rate mortgages
(ARMs) to refinance into FHA-insured fixed-rate mortgages.23 The new mortgage helped
borrowers by offering better loan terms that either reduced a borrower’s monthly payments or
helped a borrower avoid steep payment increases under his or her old loan. FHASecure expired
on December 31, 2008.
To qualify for FHASecure, borrowers originally had to meet the following eligibility criteria:
• The borrower had a non-FHA ARM that had reset.
• The borrower became delinquent on his or her loan due to the reset, and had
sufficient income to make monthly payments on the new FHA-insured loan.
• The borrower was current on his or her mortgage prior to the reset. (Some
borrowers with a minimum amount of equity in their homes could still be eligible
for the program even if they had missed payments prior to the reset.)
• The new loan met standard FHA underwriting criteria and was subject to other
standard FHA requirements (including maximum loan-to-value ratios, mortgage
limits, and up-front and annual mortgage insurance premiums).
In July 2008, FHA expanded its eligibility criteria for the program, and borrowers had to meet the
following revised eligibility requirements:
• The borrower became delinquent on his or her non-FHA ARM because of an
interest rate reset or another extenuating circumstance, and had sufficient income
to make monthly payments on the new FHA-insured loan.
• The borrower had no more than two payments that were 30 days late, or one
payment that was 60 days late, in the twelve months preceding the interest rate
reset or other extenuating circumstance.
• If the loan-to-value ratio on the FHA-insured mortgage was no higher than 90%,
the borrower may have had no more than three payments that were 30 days late,
or one payment that was 90 days late, prior to the interest rate reset or other
extenuating circumstance.
• Borrowers with interest-only ARMs or option ARMs must have been delinquent
due to an interest rate reset only (and not other extenuating circumstances), and
must have been current on their mortgages prior to the reset; the revised
eligibility criteria did not apply to these borrowers.
23 FHA already offered refinancing options for homeowners who were current on their existing fixed- or adjustable-rate
mortgages and continued to do so after the adoption of FHASecure.
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• The new loan met standard FHA underwriting criteria and was subject to other
standard FHA requirements (including maximum loan-to-value ratios, mortgage
limits, and up-front and annual mortgage insurance premiums).
FHASecure expired on December 31, 2008. In the months before its expiration, some housing
policy advocates called for the program to be extended; however, HUD officials contended that
continuing the program would be prohibitively expensive, possibly endangering FHA’s single-
family mortgage insurance program. HUD also points to the Hope for Homeowners program as
filling the role that FHASecure did in helping households avoid foreclosure.24 Supporters of
extending FHASecure argued that the statutory requirements of Hope for Homeowners may offer
less flexibility in the face of changing circumstances than FHASecure, which could have been
more easily amended by HUD.
When FHASecure expired at the end of 2008, about 4,000 loans had been refinanced through the
program.25 Critics of the program point to the relatively stringent criteria that borrowers had to
meet to qualify for the program as a possible reason that more people did not take advantage of it.
IndyMac Loan Modifications
On July 11, 2008, the Office of Thrift Supervision in the Department of the Treasury closed
IndyMac Federal Savings Bank, based in Pasadena, California, and placed it under the
conservatorship of the Federal Deposit Insurance Corporation (FDIC). In August 2008, the FDIC
put into place a loan modification program for holders of mortgages either owned or serviced by
IndyMac that were seriously delinquent or in danger of default, or on which the borrower was
having trouble making payments because of interest rate resets or a change in financial
circumstances.
The IndyMac program offers systematic loan modifications to qualified borrowers in financial
trouble. The systematic approach means that all loan modifications follow the same basic formula
to identify qualified borrowers and reduce their monthly payments in a uniform way. Such an
approach is meant to allow more modifications to happen more quickly than if each loan was
modified on a case-by-case basis.
In order to be eligible for a loan modification, the mortgage must be for the borrower’s primary
residence and the borrower must provide current income information that documents financial
hardship. Furthermore, the FDIC will conduct a net present value test to evaluate whether the
expected future benefit to the FDIC and the mortgage investors from modifying the loan is
greater than the expected future benefit from foreclosure.
If a borrower meets the above conditions, the loan is modified so that he or she has a mortgage
debt-to-income ratio of 38%, meaning that the borrower’s monthly mortgage payments (including
principal, interest, taxes, and insurance) cannot exceed 38% of his or her monthly income. The
goal is to lower a borrower’s monthly payments to a level that is sustainable based on the
borrower’s current income. The 38% DTI can be achieved by lowering the interest rate, extending
24 HUD Mortgagee Letter 08-41, “Termination of FHASecure,” December 19, 2008, available at http://www.hud.gov/
offices/adm/hudclips/letters/mortgagee/2008ml.cfm.
25 Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2009 to 2019,” January 2009,
available at http://www.cbo.gov/ftpdocs/99xx/doc9957/01-07-Outlook.pdf.
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the period of the loan, forbearing a portion of the principal, or a combination of the three. The
interest rate is set at the Freddie Mac survey rate for conforming mortgages, but if necessary it
can be lowered for a period of up to five years in order to reach the 38% DTI; after the five-year
period, the interest rate rises by no more than 1% each year until it reaches the Freddie Mac
survey rate.
FDIC Chairman Sheila Bair estimates that about 13,000 loans were modified under this program
while IndyMac was under the FDIC’s conservatorship.26 The FDIC completed a sale of IndyMac
to OneWest Bank on March 19, 2009. OneWest will continue the loan modification program,
subject to the terms of a loss-sharing agreement with the FDIC.27
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac28 are playing key roles in the Making Home Affordable program,
described in an earlier section. In addition, they have undertaken a number of other efforts to help
troubled borrowers with mortgages owned or guaranteed by Fannie or Freddie, and to help
tenants in foreclosed properties that they own. These efforts have included the Streamlined
Modification Plan (SMP), a mortgage modification plan that was implemented in December 2008
but has since been replaced by Making Home Affordable; foreclosure moratoria while the SMP
was put into place; and offering month-to-month leases to qualified renters living in foreclosed
properties so that they can remain in their homes.
Streamlined Modification Plan
On November 11, 2008, James Lockhart, the director of the Federal Housing Finance Agency
(FHFA), which oversees Fannie Mae and Freddie Mac, announced a new Streamlined
Modification Program that Fannie, Freddie, and certain private mortgage lenders and servicers
planned to undertake.29 Fannie Mae and Freddie Mac had helped troubled borrowers through
individualized loan modifications for some time, but the SMP represented an attempt to formalize
the process and set an industry standard. The SMP took effect on December 15, 2008, but has
since been replaced by the Making Home Affordable plan, announced in February 2009 and
described in an earlier section of this report.
26 Remarks by FDIC Chairman Sheila Bair to the National Association of Realtors Midyear Legislative Meeting and
Trade Expo, Washington, D.C., May 12, 2009. A transcript of these remarks is available at http://www.fdic.gov/news/
news/speeches/chairman/spmay1209.html.
27 Federal Deposit Insurance Corporation, “FDIC Closes Sale of IndyMac Federal Bank, Pasadena, California,” press
release, March 19, 2009, http://www.fdic.gov/news/news/press/2009/pr09042.html.
28 Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that were chartered by Congress to
provide liquidity to the mortgage market. Rather than make loans directly, the GSEs buy loans made in the private
market and either hold them in their own portfolios or securitize and sell them to investors. The GSEs were put under
the conservatorship of FHFA on September 7, 2008. For more information on the GSEs in general, see CRS Report
RL33756, Fannie Mae and Freddie Mac: A Legal and Policy Overview, by N. Eric Weiss and Michael V. Seitzinger,
and for more information on the conservatorship, see CRS Report RS22950, Fannie Mae and Freddie Mac in
Conservatorship, by Mark Jickling.
29 The private mortgage lenders and servicers who participated in the Streamlined Modification Program are primarily
members of the HOPE NOW Alliance, a voluntary alliance of industry members that formed to help homeowners avoid
foreclosure. The HOPE NOW Alliance, and its involvement with the SMP, is described in detail in this report.
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In order for borrowers whose mortgages were owned by Fannie Mae or Freddie Mac to be
eligible for the SMP, they had to meet the following criteria:
• The mortgage must have originated on or before January 1, 2008.
• The mortgage must have had a loan-to-value ratio of at least 90%.
• The home must have been a single-family residence occupied by the borrower,
and it must have been the borrower’s primary residence.
• The borrower must have missed at least three mortgage payments.
• The borrower must not have filed for bankruptcy.
Mortgages insured or guaranteed by the federal government, such as those guaranteed by FHA,
the Veterans’ Administration, or the Rural Housing Service, were not eligible for the SMP.
The SMP shared many features of the FDIC’s plan to modify troubled mortgages held by
IndyMac. Borrowers who qualified for the program had to provide income information that was
current within the last 90 days to the mortgage servicer. Based on this updated income
information, borrowers’ monthly mortgage payments were lowered so that the household’s
mortgage debt-to-income ratio was 38% (not including second lien payments). After borrowers
successfully completed a three-month trial period (by making all of the payments at the proposed
modified payment amount), the loan modification automatically took effect.
In order to reach the 38% mortgage debt-to-income ratio, servicers were required to follow a
specific formula. First, the servicer capitalized late payments and accrued interest (late fees and
penalties were waived). If this resulted in a DTI of 38% or less, the modification was complete. If
the DTI was higher than 38%, the servicer could extend the term of the loan to up to 40 years
from the effective date of the modification. If the DTI was still above 38%, the interest rate could
be adjusted to the current market rate or lower, but to no less than 3%. Finally, if the DTI was still
above 38% after the first three steps were taken, servicers could offer principal forbearance. The
amount of the principal forbearance would not accrue interest and was non-amortizing, but would
result in a balloon payment when the loan was paid off or the home was sold.
Negative amortization was not allowed under the SMP, nor were principal forgiveness or
principal write-downs. In order to encourage participation in the SMP, Fannie Mae and Freddie
Mac paid servicers $800 for each loan modification completed through the program. If the SMP
did not produce an affordable payment for the borrower, servicers were to work with borrowers in
a customized fashion to try to modify the loan in a way that the homeowner could afford.
Fannie Mae and Freddie Mac completed over 51,000 loan modifications between January 2009
and April 2009, when Fannie and Freddie stopped using the SMP and began participating in the
Making Home Affordable program instead.30 However, it is unclear how many of these loan
modifications were done specifically through the SMP.
30 Federal Housing Finance Agency, “Foreclosure Prevention Report: April 2009,” July 15, 2009, available at
http://www.fhfa.gov/webfiles/14588/April_Foreclosure_Prevention71509F.pdf.
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Foreclosure Moratoria
On November 20, 2008, Fannie Mae and Freddie Mac announced that they would suspend
foreclosure sales and evictions between November 26, 2008, and January 9, 2009, in order to
have time to reach out to borrowers who might be eligible for loan modifications under the SMP.
Fannie later extended its moratorium through March 31, 2009, and Freddie extended its
moratorium through April 1, 2009.
Renter Policies
In January 2009, Fannie Mae and Freddie Mac each announced policies to allow qualified renters
living in foreclosed single-family properties owned by Fannie or Freddie, respectively, to remain
in their homes under new month-to-month leases.31 Freddie Mac’s policy also allows qualified
former owner-occupants to remain in foreclosed homes as renters under new month-to-month
leases.
Federal Reserve
On January 27, 2009, the Federal Reserve announced the Homeownership Preservation Policy.32
This plan provides guidelines to prevent foreclosures on residential mortgages that the Federal
Reserve Banks hold, own, or control subject to Section 110 of the Emergency Economic
Stabilization Act of 2008 (EESA), such as mortgage assets that they may receive as collateral for
lending to troubled banks.
In order to be eligible for a loan modification under the Homeownership Preservation Policy, a
borrower must be at least 60 days delinquent (although the Fed may make exceptions for
households experiencing circumstances that are likely to result in their becoming at least 60 days
delinquent). If the expected net present value of a loan modification is greater than the expected
net present value of foreclosure, the Fed will modify mortgages by reducing the interest rate,
extending the loan term, offering principal forbearance or principal forgiveness, or changing other
loan terms. The modified mortgage must have a fixed interest rate, a term of no more than 40
years, and result in a mortgage debt-to-income ratio of no more than 38% for the borrower. The
Fed must also have a reasonable expectation that the borrower will be able to repay the modified
loan. If the borrower’s mortgage debt is greater than 125% of the current estimated value of the
property, the Fed will prioritize principal reductions over other types of loan modifications where
possible.
This policy applies to whole mortgages that the Federal Reserve Banks hold, own, or control. In
the case of securitized mortgages in which the Fed has an interest, the Fed will encourage
servicers to undertake similar loan modifications and support their efforts to do so.
31 For more information, see “Fannie Mae Announces National REO Rental Policy,” press release, January 13, 2009, at
http://www.fanniemae.com/newsreleases/2009/4581.jhtml?p=Media&s=News+Releases, and “Freddie Mac Extends
Eviction Suspension Until March, Launches Rental Option for Foreclosed Borrowers, Tenants,” press release, January
30, 2009, at http://www.freddiemac.com/news/archives/servicing/2009/20090130_reo-rental.html.
32 Details of the Homeownership Preservation Policy can be found on the Federal Reserve’s website at
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090130a1.pdf.
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Foreclosure Counseling Funding to NeighborWorks America
Another federal effort to slow the rising number of foreclosures has been to appropriate additional
funding for housing counseling. In particular, Congress has recently appropriated funding
specifically for foreclosure mitigation counseling to be administered by NeighborWorks America,
a non-profit created by Congress in 1978 that has a national network of community partners.33
NeighborWorks traditionally provides housing counseling to homebuyers and homeowners
through its network organizations, and also trains other non-profit housing counseling
organizations in foreclosure counseling.
The Consolidated Appropriations Act, 2008 (P.L. 110-161) appropriated $180 million for
NeighborWorks to distribute for foreclosure mitigation counseling, which it has done by setting
up the National Foreclosure Mitigation Counseling Program (NFMCP).34 NeighborWorks
competitively awards the funding to qualified housing counseling organizations.35 Congress
directed NeighborWorks to award the funding with a focus on areas with high default and
foreclosure rates on subprime mortgages. The Housing and Economic Recovery Act of 2008 (P.L.
110-289) appropriated an additional $180 million for NeighborWorks to distribute through the
NFMCP, $30 million of which was to be distributed to counseling organizations to provide legal
help to homeowners facing delinquency or foreclosure. The Omnibus Appropriations Act, 2009
(P.L. 111-8) included $50 million for NeighborWorks to distribute through the NFMCP.
Foreclosure Mitigation Efforts Targeted to Servicemembers
The federal government has made a number of efforts to prevent foreclosures specifically among
members of the Armed Forces. The Servicemembers Civil Relief Act (P.L. 108-189), which
became law on December 19, 2003, prohibits foreclosure completions on properties owned by
servicemembers during a period of military service or within 90 days of the servicemember’s
return from military service. 36 The law also prohibits evictions of active servicemembers or their
dependents, subject to certain conditions. The Housing and Economic Recovery Act of 2008 (P.L.
110-289) temporarily extended the prohibition on foreclosure completions from 90 days to nine
months after a servicemember’s return from military service, until the end of 2010, and also
directed the Secretary of Defense to develop a foreclosure counseling program for members of
the Armed Forces returning from active duty abroad.
33 Each year, Congress appropriates funding to HUD to distribute to certified housing counseling organizations to
undertake various types of housing counseling, including pre-purchase counseling and post-purchase counseling.
Congress also appropriates funding to NeighborWorks each year for neighborhood reinvestment activities, including
housing counseling. The recent funding appropriated specifically for foreclosure mitigation counseling is separate from
both of these other usual appropriations.
34 For more information on the National Foreclosure Mitigation Counseling Program, see the NeighborWorks website
at http://www.nw.org/network/nfmcp/default.asp#info.
35 HUD-approved housing counseling intermediaries, state housing finance agencies, and NeighborWorks
organizations are eligible to receive funds through the NFMCP.
36 This law is a revision of the Soldiers’ and Sailors’ Civil Relief Act of 1940 (P.L. 76-861), which itself was a revision
of the Soldiers’ and Sailors’ Civil Relief Act of 1918 (P.L. 65-103). Both earlier laws also included foreclosure
protections for members of the military on or recently returned from active duty.
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State and Local Initiatives
In addition to federal efforts to prevent foreclosures, a number of state and local governments
have implemented their own programs aimed at helping homeowners stay in their homes. Some
of these efforts include supporting voluntary or mandatory pre-foreclosure counseling initiatives,
imposing foreclosure moratoria, providing short-term loans to help homeowners at risk of
foreclosure, enacting stronger reporting requirements on lenders’ loan modification efforts, and
initiating legal actions. Many states and localities have also implemented educational efforts to
reach out to troubled homeowners.
According to the Pew Charitable Trusts Center on the States, as of April 2008, 20 states have laws
or regulations involving foreclosure mitigation, 24 states have statewide counseling efforts, 13
states have a foreclosure intervention hotline, and 9 states have developed loan funds to help
homeowners refinance into more affordable mortgages or to provide short-term loans to
borrowers facing foreclosure. Furthermore, at least 14 states have created foreclosure prevention
task forces to attempt to address the problem of rising foreclosure rates.37
Private Initiatives
While the government has initiated the mortgage modification programs described above, a
number of private mortgage lenders and servicers have voluntarily attempted to implement their
own foreclosure prevention initiatives. Many private lenders have engaged in ongoing individual
loan modifications for some time, but have recently launched more targeted programs to help
troubled borrowers. This section describes some of these programs in order to provide illustrative
examples of private sector initiatives to prevent foreclosures; it is not intended to be a
comprehensive list of private foreclosure prevention efforts.
HOPE NOW Alliance
The HOPE NOW Alliance is a voluntary alliance of mortgage servicers, lenders, investors,
counseling agencies, and others that formed in October 2007. The alliance is a private sector
initiative created with the encouragement of the federal government to engage in active outreach
efforts to troubled borrowers. Member organizations identify borrowers who may have difficulty
making loan payments before they become seriously delinquent on their mortgages, and work
with such borrowers to work out loan modifications that can keep the borrowers in their homes.
When the alliance was first announced, eleven mortgage servicers were involved; by November
2008, 27 servicers had become member organizations.
HOPE NOW Alliance members have undertaken several initiatives to help troubled homeowners.
One such initiative the alliance has supported is a hotline, operated by the Homeownership
Preservation Foundation, that connects borrowers to HUD-approved housing counselors who can
help homeowners contact their servicers and work out a plan to avoid foreclosure. The hotline
37 The Pew Charitable Trusts Center on the States, Defaulting on the Dream: States Respond to America’s Foreclosure
Crisis, April 2008, http://www.pewcenteronthestates.org/uploadedFiles/
PCS_DefaultingOnTheDream_Report_FINAL041508_01.pdf.
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serves as a first point of contact for troubled borrowers, and both HUD and non-profit
organizations such as NeighborWorks America advocate its use.38
HOPE NOW also encourages its lenders and servicers to coordinate their efforts to modify
mortgages. On December 6, 2007, the HOPE NOW Alliance announced a streamlined plan that
would allow servicers to freeze the interest rate on certain subprime ARMs for borrowers who
were current on their mortgages but would not be able to afford higher payments after their rates
reset. While the plan received assurances from the government that the modifications would not
affect certain accounting or tax issues surrounding securitized loans, servicers who went forward
with modifications could not be certain that investors would not mount legal challenges.39 Most
recently, HOPE NOW announced on November 11, 2008, that most of its servicers would
participate in the SMP (described earlier in this report), with the idea that the plan would create a
new industry-wide approach to mortgage modifications.
According to HOPE NOW’s own reports, the alliance expected to prevent 2.2 million
foreclosures and complete almost 950,000 loan modifications in 2008 through these efforts.40
However, some of these prevented foreclosures are the result of solutions other than loan
modifications. These other solutions could include repayment plans, under which it is possible
that some borrowers could end up with higher, not lower, monthly payments, and which may not
substantially reduce the risk that these homeowners will eventually end up in default or
foreclosure. They could also involve short sales or deeds-in-lieu-of-foreclosure, in which the
homeowner avoids the foreclosure process but still loses the home.
Bank of America
On October 6, 2008, Bank of America announced a loan modification program for homeowners
whose mortgages are serviced by Countrywide. (Countrywide was acquired by Bank of America
on July 1, 2008.)41 The program became effective December 1, 2008, and targets borrowers who
are seriously delinquent, or in danger of becoming seriously delinquent, on their mortgages due to
loan features such as interest rate resets.
The Bank of America program aims to reduce borrowers’ mortgage debt to no more than 34% of
gross monthly income for the first year of the modification. Subsequent rises in the interest rate or
other loan terms are structured in a way that minimizes payment shock to the borrower. Types of
loan modifications can include using the Hope for Homeowners program, described above, to
help homeowners refinance into FHA-insured mortgages; reducing the interest rate; and reducing
the principal balance on option-ARMs. Eligibility for the program is limited to primary
residences.
38 The phone number for the HOPE NOW Alliance hotline is 888-995-HOPE (4673).
39 For more information on the tax and accounting issues surrounding this plan, see CRS Report RL34372, The HOPE
NOW Alliance/American Securitization Forum (ASF) Plan to Freeze Certain Mortgage Interest Rates, by David H.
Carpenter and Edward V. Murphy.
40 The HOPE NOW Alliance, “HOPE NOW Projects Big Increases in Foreclosure Prevention Successes in 2009,”
press release, Dec. 22, 2008, available online at http://www.hopenow.com/press_release/files/
HOPE%20NOW%202008%20Year%20End%20-%20November%20Data%20Release.pdf.
41 Bank of America, “Bank of America Announces Nationwide Homeownership Retention Program for Countrywide
Customers,” press release, October 6, 2008, http://newsroom.bankofamerica.com/index.php?s=press_releases&item=
8272.
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In addition to its own foreclosure prevention efforts, Bank of America is a participating servicer
in the Administration’s Making Home Affordable plan.
JP Morgan Chase
On October 31, 2008, JP Morgan Chase announced an expansion of its foreclosure prevention
efforts.42 This expansion includes reaching out to borrowers before they begin to miss payments,
and conducting a systematic review of all of the mortgages held by Chase to ascertain which
borrowers might be eligible for loan modifications. Chase will offer troubled borrowers a
combination of reductions in their interest rate and principal forbearance, and will review each
mortgage before it enters the foreclosure process to ensure that eligible borrowers were offered
loan modifications. Chase specifically excludes negative amortization as a loan modification
option. Chase also announced that it would not begin any foreclosures while the expanded
program was being implemented.
In order to be eligible for a loan modification, borrowers must have a mortgage that is owned by
Chase, Washington Mutual, or EMC. (EMC and Washington Mutual were acquired by JP Morgan
Chase in March 2008 and September 2008, respectively.) If a borrower’s mortgage is serviced,
but not owned, by one of these companies, the investors must give permission for the loan to be
modified. To be eligible, borrowers must occupy the home as their primary residence.
In addition to its own foreclosure prevention efforts, JP Morgan Chase is a participating servicer
in the Administration’s Making Home Affordable plan.
Citigroup
On November 11, 2008, Citigroup announced that it was streamlining its existing mortgage
modification program in the mold of the IndyMac loan modification model.43 Under the
streamlined program, Citigroup uses a formula to arrive at a certain mortgage payment-to-income
ratio, and then uses a combination of interest rate reductions, extensions of the loan term, or
forgiveness of part of the principal in order to reach that ratio. Citigroup also announced the Citi
Homeowner Assistance program, in which it pledged to reach out to borrowers who were not yet
delinquent on their mortgages but who were in danger of falling behind on their loan payments.
Through this program, Citigroup plans to concentrate its efforts on geographic areas that are
especially economically hard-hit, such as those areas experiencing steep home price declines or
rapid rises in unemployment. Finally, Citigroup has announced a foreclosure moratorium in order
to give it more time to reach out to borrowers and complete loan modifications.
Currently, these programs are in effect for mortgage loans that Citigroup owns. Citi is working
with investors to expand the program to includes mortgages that are serviced, but not owned, by
Citigroup.
42 JP Morgan Chase, “Chase Further Strengthens Robust Programs to Keep Families in Homes,” press release, October
31, 2008, http://files.shareholder.com/downloads/ONE/514430481x0x245621/b879b4eb-40c0-43f8-8614-
6f2113759d0c/344473.pdf.
43 Citigroup, “Citi Announces New Preemptive Initiatives to Help Homeowners Remain in Their Homes,” press
release, November 11, 2008, http://www.citigroup.com/citi/press/2008/081111a.htm.
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On March 3, 2009, Citigroup announced an expansion to its Homeowner Assistance Program
targeted at borrowers who recently became unemployed.44 Borrowers with mortgages that are
both owned and serviced by CitiMortgage and who are currently unemployed may be eligible to
make reduced mortgage payments for three months. An eligible borrower must be at least 60 days
delinquent or in foreclosure, must live in the home as his or her primary residence, and must meet
certain other eligibility requirements.
In addition to its own foreclosure prevention efforts, CitiMortgage is a participating servicer in
the Administration’s Making Home Affordable plan.
Other Foreclosure Prevention Proposals
Some observers argue that the programs outlined above, which have already been implemented
by various government and private organizations, have not been effective enough at stopping the
rising foreclosure rate and keeping people in their homes. This section briefly outlines some
existing proposals for further action to help prevent foreclosures.
Changing Bankruptcy Law
One method that has been suggested to help more homeowners remain in their homes is to amend
bankruptcy law to allow a judge to order a mortgage loan modification as part of a bankruptcy
proceeding. Bankruptcy judges currently have the authority to modify or reduce other types of
outstanding debt obligations, including mortgages on second homes and vacation homes, but this
authority does not extend to mortgages on primary residences. Opponents of such a change do not
want judges to have such broad power to amend a contract after the fact. They argue that allowing
these “cramdowns” would make lenders more hesitant to make mortgage loans in the future,
since the threat of a loan being modified in this way could make mortgage lending more risky.
Supporters of amending bankruptcy law say that, in addition to helping a borrower in bankruptcy
avoid foreclosure through a court-mandated loan modification, such a change might also
encourage lenders to work with borrowers to modify loans before the bankruptcy process begins
in the first place.
Provisions to amend bankruptcy law to allow judges to modify mortgages on primary residences
were included in H.R. 1106, the Helping Families Save Their Homes Act of 2009, which passed
the House on March 5, 2009. However, bankruptcy provisions were not included in the Senate’s
version of the bill, S. 896, which passed the Senate on May 6, 2009. A modified version of the
Senate bill was signed into law (P.L. 111-22) on May 20, 2009, without the cramdown provision.
(For a description of recent legislative proposals to amend bankruptcy law to allow judges to
order mortgage modifications, see CRS Report RL34301, The Primary Residence Exception:
Legislative Proposals in the 111th Congress to Amend the Bankruptcy Code to Allow the Strip
Down of Certain Home Mortgages, by David H. Carpenter.)
44 Citigroup, “Citi Expands Homeowner Assistance Program to Help Recently Unemployed Borrowers Stay in Their
Homes,” press release, March 3, 2009, http://www.citigroup.com/citi/press/2009/090303a.htm.
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Foreclosure Moratorium
Some advocates have called for placing a temporary moratorium on foreclosure completions.
Proponents of this idea argue that placing a freeze on foreclosure completions would give
homeowners and lenders more time to work out sustainable loan modifications that would allow
homeowners to remain in their homes and turn troubled mortgages back into performing loans
that benefit the lenders. Opponents of a foreclosure moratorium argue that the government should
not interfere with the right of a lender to complete foreclosure proceedings against a borrower
who has defaulted on his or her loan. They note that delaying foreclosure proceedings through a
foreclosure moratorium could result in greater losses for the lender if the ultimate outcome is still
a foreclosure and the home’s price has fallen further in the interim.
Fannie Mae, Freddie Mac, and some private lenders have instituted temporary foreclosure
moratoria while they put foreclosure prevention programs in place. While a wider foreclosure
moratorium had widely been considered a radical idea until recently, the severity of the increase
in foreclosures and its impact on the economy has led some to give the idea serious consideration.
(For an analysis of the economic principals behind a foreclosure moratorium, see CRS Report
RL34653, Economic Analysis of a Mortgage Foreclosure Moratorium, by Edward V. Murphy.
For an analysis of the legal issues involved, see CRS Report RL34369, Constitutional Issues
Relating to Proposals for Foreclosure Moratorium Legislation That Affects Existing Mortgages,
by David H. Carpenter.)
Issues and Challenges Associated with Preventing
Foreclosures
There are several challenges associated with designing successful programs to prevent
foreclosures. Some of these challenges are practical and concern issues surrounding the
implementation of loan modifications. Other challenges are more conceptual, and are related to
questions of fairness and precedent. This section describes some of the most prominent
considerations involved in programs to preserve homeownership.
Who Has The Authority to Modify Mortgages?
In recent years, the practice of lenders packaging mortgages into securities and selling them to
investors has become more widespread. This practice is known as securitization, and the
securities that include the mortgages are known as mortgage-backed securities (MBS). When
mortgages are sold through securitization, several players become involved with any individual
mortgage loan, including the lender, the servicer, and the investors who hold shares in the MBS.
The servicer is usually the organization that has the most contact with the borrower, including
receiving monthly payments and initiating any foreclosure proceedings. However, servicers are
usually subject to contracts with investors which limit the activities that the servicer can
undertake and require it to safeguard the investors’ profit. One major question facing foreclosure
prevention programs, therefore, is who actually has the authority to make a loan modification.
Contractual obligations may limit the amount of flexibility that servicers have to modify loans in
ways that could arguably yield a lower return for investors. In some cases, loan modifications can
result in less of a loss for investors than foreclosure; however, servicers may not want to risk
having investors challenge their assessment that a modification is more cost-effective than a
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foreclosure. This problem can be especially salient in streamlined programs in which large
numbers of loans are modified at once. With such streamlined programs, the cost-effectiveness of
loan modifications depends on questions such as how many loans would have likely ended up in
foreclosure without the modification, making it more difficult to say whether wholesale loan
modifications are in the best interest of investors.
One possible way to partially address the question of who can modify mortgages is to provide a
safe harbor for servicers. In general, a safe harbor protects servicers who engage in certain
mortgage modifications from lawsuits brought by investors. While proponents of a safe harbor
believe that a safe harbor is necessary to encourage servicers to modify more mortgages without
fear of legal repercussions, opponents argue that a safe harbor infringes on investors’ rights and
could even encourage servicers to modify mortgages that are not in trouble if it benefits their own
self-interest. P.L. 111-22, the Helping Families Save Their Homes Act of 2009, provides a safe
harbor for servicers who modify mortgages consistent with the Making Home Affordable
program guidelines or by using the Hope for Homeowners program. The legislation specifies that
the safe harbor does not protect servicers or individuals from liability for any fraud committed in
their handling of the mortgage or the mortgage modification.
Volume of Delinquencies and Foreclosures
Another issue facing loan modification programs is the sheer number of delinquencies and
foreclosure proceedings underway. Lenders and servicers have a limited number of employees to
reach out to troubled borrowers and find solutions. Contacting borrowers—some of whom may
avoid contact with their servicer out of embarrassment or fear—and working out large numbers of
individual loan modifications can overwhelm the capacity of the lenders and servicers who are
trying to help homeowners avoid foreclosure. Streamlined plans that use a formula to modify all
loans that meet certain criteria may make it easier for lenders and servicers to help a greater
number of borrowers in a shorter amount of time. However, streamlined plans are more likely to
run into the contractual issues between servicers and investors described above.
Possibility of Re-default
Another major challenge associated with loan modification programs is the possibility that a
homeowner who receives a modification will nevertheless default on the loan again in the future.
This possibility is especially problematic if the home’s value is falling, because in that case
delaying an eventual foreclosure reduces the value that the lender can recoup through a
foreclosure sale. Data released quarterly by the Office of the Comptroller of the Currency (OCC)
and the Office of Thrift Supervision (OTS) show that over 40% of loans modified in the first
quarter of 2008 were 30 or more days delinquent again three months after the modification, and
53% were 30 or more days delinquent six months after the modification. The same data show that
a smaller percentage of modified loans were 60 or more days delinquent: over 23% of loans were
60 or more days delinquent three months after the modification, and nearly 37% were 60 or more
days delinquent six months after the modification.45 Re-default rates follow the same general
pattern for loans modified in later quarters of 2008.
45 Office of the Comptroller of the Currency and Office of Thrift Supervision, “OCC and OTS Mortgage Metrics
Report: Disclosure of National Bank and Federal Thrift Mortgage Loan Data, First Quarter 2009,” June 30, 2009, pp.
27-28, available at http://files.ots.treas.gov/4820471.pdf.
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Opponents of aggressive loan modification programs point to these data as evidence that loan
modifications are not effective at preventing foreclosures. However, proponents of such programs
argue that the definition of loan modification used in these data is overly broad, and that many of
the modifications did not actually result in lower monthly payments for the borrower.46 These
supporters believe that loan modifications that focus on creating truly affordable payments for
troubled borrowers will exhibit lower rates of re-default.
The OCC and the OTS have begun to include data in their quarterly report that show re-default
rates for loans modified in 2008 according to whether the loan modification increased monthly
payments, decreased monthly payments, or left monthly payments unchanged. These data show
that, six months after modification, the re-default rate for loan modifications that resulted in
monthly payments being reduced by 20% or more was slightly over 24%. This compares to a re-
default rate of nearly 29% for loans where monthly payments were reduced by between 10% and
20%; just over 36% for loans where payments were reduced by less than 10%; over 54% for
loans where payments remained unchanged; and 50% for loans where monthly payments
increased. While loan modifications that lower monthly payments do appear to perform better
than modifications that increase monthly payments or leave them unchanged, a significant
number of these loans still become delinquent again after the loan modification.47
Fairness Issues
Opponents of some foreclosure prevention plans argue that it is not fair to help homeowners who
have fallen behind on their mortgages while homeowners who have been scraping by to stay
current receive no help. Others argue that borrowers who got in over their heads, particularly if
they intentionally took out mortgages that they knew they could not afford, should face
consequences. Supporters of loan modification plans point out that many borrowers go into
foreclosure for reasons outside of their control, and that some troubled borrowers may have been
victims of deceptive, unfair, or fraudulent lending practices. Furthermore, a case can be made that
foreclosure prevention programs are necessary not only out of compassion for the homeowner,
but because foreclosures can create problems for other homeowners in the neighborhood by
dragging down property values or putting a strain on local governments.
To address these concerns about fairness, some loan modification programs reach out to
borrowers who are struggling to make payments but are not yet delinquent on their mortgage.
Most programs also specifically exclude individuals who provided false information in order to
obtain a mortgage.
Incentives
Another challenge is that loan modification programs may provide an incentive for borrowers to
intentionally miss payments or default on their mortgage in order to qualify for a loan
46 Remarks by FDIC Chairman Sheila Bair to the New America Foundation conference “Did Low-Income Home
Ownership Go Too Far?”: Washington, D.C. , December 17, 2008. A transcript of these remarks is available at
http://www.fdic.gov/news/news/speeches/archives/2008/chairman/spdec1708.html.
47 Office of the Comptroller of the Currency and Office of Thrift Supervision, “OCC and OTS Mortgage Metrics
Report: Disclosure of National Bank and Federal Thrift Mortgage Loan Data, First Quarter 2009,” June 30, 2009, p. 32,
available at http://files.ots.treas.gov/4820471.pdf.
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modification that provides more favorable mortgage terms. While many of the programs
described above, including Hope for Homeowners, specifically require that a borrower must not
have intentionally missed payments on his or her mortgage in order to qualify for the program, it
can be difficult to prove a person’s intention. Programs that are designed to reach out to distressed
borrowers before they miss any payments, as well as those who are already delinquent, may
minimize the incentive for homeowners to intentionally fall behind on their mortgages in order to
receive help.
Precedent
Some opponents of government efforts to provide or encourage loan modifications argue that
changing the terms of a contract retroactively sets a troubling precedent for future mortgage
lending. These opponents argue that if lenders believe that they could be forced to change the
terms of a mortgage in the future, they will be less likely to provide mortgage loans in the first
place or will only do so at higher interest rates to counter the perceived increase in the risk of not
being repaid in full. Most existing programs attempt to address this concern by limiting the
program’s scope. Often, these programs apply only to mortgages that originated during a certain
time frame, and end at a pre-determined date.
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Appendix. Comparison of Recent Federal
Foreclosure Prevention Initiatives
Table A-1. Features of Selected Programs
Basic Eligibility
Program/Initiative
Requirements Program
Details
Status
Making Home Affordable:
Borrower has a mortgage
Lenders and servicers will
Announced February 18,
Home Affordable
held by any participating
contact eligible borrowers, 2009
Modification Program
lender or servicer
but borrowers are
(HAMP)
encouraged to contact
Program began on March
Borrower is experiencing
their servicers as well
4, 2009
a financial hardship leading
to difficulty making
Servicer modifies
Estimated to be able to
mortgage payments or is
mortgage to achieve 38%
help between 3 and 4
already delinquent
DTI, primarily using
million homeowners
interest rate reduction
Borrower occupies home
As of November 26, 2009,
as his/her primary
Government matches
over 697,000 active trial
residence
further reductions to
modifications and over
achieve 31% DTI
31,300 active permanent
Mortgage originated on or
modifications were
before January 1, 2009
Government will make
underway
incentive payments to
Unpaid principal balance is
servicers for making
no higher than $729,750
modifications, and to both
for a one-unit property
borrowers (in the form of
(this is the Fannie
principal reduction) and
Mae/Freddie Mac
servicers if the borrower
conforming loan limit for
remains current on the
high cost areas; higher
new loan
limits apply for two- to
four-unit properties)
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Basic Eligibility
Program/Initiative
Requirements
Program Details
Status
HOPE for Homeowners
Borrower has a non-FHA
Borrower contacts lender
Active; began October 1,
mortgage and lender
to determine eligibility
2008, and slated to expire
agrees to participate
September 30, 2011
Borrower refinances into
Borrower is at risk of
FHA-insured fixed rate
As of July 16, 2009, 949
default or foreclosure
mortgage for no more
applications had been
than 96.5% of home’s
received and 50 loans had
Borrower occupies home
currently appraised value
closed out of about
as his/her primary
(mortgage may not exceed 400,000 homeowners that
residence
$550,440)
were originally estimated
Borrower has experienced
could be served
Lender absorbs loss
financial hardship and has
resulting from write-down
total monthly mortgage
in mortgage value
payments higher than 31%
of gross monthly income
Borrower shares equity in
home with FHA when the
Mortgage originated on or
home is sold
before January 1, 2008,
and at least 6 payments
Borrower pays up-front
have been made
and annual mortgage
insurance premiums
Borrower does not have a
fraud conviction in the
Second lien-holders
last 10 years, has not
release their liens in
intentionally defaulted, and exchange for an upfront
did not provide false
payment
information to obtain
original mortgage
FDIC IndyMac
Borrower has a loan
FDIC contacts eligible
Active; announced July 11,
modificatons
owned or serviced by
borrowers, but also
2008
IndyMac
encourages troubled
homeowners to contact
Served about 13,000
Borrower is (1) seriously
FDIC or IndyMac to see if
homeowners while under
delinquent or in danger of
they qualify
FDIC conservatorship;
default, or (2) having
program expected to
trouble making mortgage
Mortgages are
continue under IndyMac’s
payments due to interest
systematically modified to
new owner, OneWest
rate resets or changes in
achieve monthly payments
Bank
financial circumstances
of no more than 38% of
borrowers’ monthly
Borrower occupies home
income
as his/her primary
residence
Achieves 38% mortgage
debt-to-income ratio by a
Borrower provides
combination of lowering
current income
the interest rate,
information documenting
extending the loan term,
financial hardship
or forbearing part of the
Loan modification meets
principal
“net present value test,”
meaning that the loan
modification must be less
costly for FDIC than
foreclosure
Congressional Research Service
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.
Preserving Homeownership: Foreclosure Prevention Initiatives
Basic Eligibility
Program/Initiative
Requirements
Program Details
Status
FHASecure
Borrower had a non-FHA
Borrower contacted
Announced August 31,
ARM
lender to determine
2007. Expired Dec. 31,
eligibility
2008
Borrower was delinquent
due to an interest rate
Borrower refinanced into
Estimated to have served
reset or other extenuating
new, fixed-rate, FHA-
about 4,000 homeowners
circumstances
insured mortgage
Borrower occupied home
Borrower’s new loan met
as his/her primary
standard FHA
residence
underwriting criteria
Borrower had sufficient
Borrower met other
income to pay new loan
standard FHA
requirements, such as
Borrower missed no more paying FHA insurance
than a minimum number of premiums
payments prior to reset or
onset of extenuating
circumstances (or had
sufficient equity in the
home)
Fannie Mae and Freddie
Borrower had a loan
Borrower contacted
Began December 15, 2008.
Mac Streamlined
owned by Fannie Mae or
lender to determine
Replaced by Making Home
Modification Plan
Freddie Mac
eligibility
Affordable in March 2009
Borrower had missed
Mortgages were
Fannie and Freddie
three or more monthly
systematically modified to
completed 51,115 loan
payments
achieve 38% mortgage
modifications between
debt-to-income ratio
January 2009 and April
Borrower occupied home
2009; however, it is
as his/her primary
Modification followed the
unclear how many of these
residence
following steps, in order,
modifications are
as necessary to achieve
Mortgage loan-to-value
attributable to the SMP
38% DTI: (1) capitalize late
ratio was at least 90%
payments and accrued
Mortgage originated on or
interest; (2) extend loan
before January 1, 2008
term for up to four years
from modification date; (3)
Borrower was not in
adjust interest rate to no
active bankruptcy
lower than 3%; (4)
principal forbearance.
Servicers received
payment for each
modification completed
Congressional Research Service
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.
Preserving Homeownership: Foreclosure Prevention Initiatives
Basic Eligibility
Program/Initiative
Requirements
Program Details
Status
Federal Reserve
Borrower has a loan held,
Fed contacts eligible
Announced January 27,
Homeownership
owned, or controlled by a
borrowers
2009
Preservation Policy
Federal Reserve Bank
Mortgages are modified to
Borrower is at least 60
achieve a DTI of no more
days delinquent, or is
than 38% using interest
experiencing
rate reductions, loan term
circumstances making it
extensions, principal
likely that he or she will
forbearance, principal
become 60 days
forgiveness, or other
delinquent
changes to loan terms
Loan modification meets
Modified loan has a fixed
“net present value test,”
interest rate and loan term
meaning that the loan
of no more than 40 years
modification must be less
costly for the Fed than
foreclosure
Reasonable likelihood that
borrower can repay new
loan
Source: Table created by CRS.
Author Contact Information
Katie Jones
Analyst in Housing Policy
kmjones@crs.loc.gov, 7-4162
Congressional Research Service
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