In a statement delivered before the Committee on Financial Services of the U.S. House of Representatives earlier this week, John M. Reich, Director of the Office of Thrift Supervision (OTS), offered an alternative foreclosure prevention plan to the one under consideration from the Federal Housing Administration (FHA).
Representing the interests of the 826 thrift institutions under his agency’s supervision, Reich began by explaining to committee members just how much of a stake the thrift industry has in loan originations in this country and how much the subprime meltdown has impacted its members’ businesses.
Having such a vested interest in how many borrowers will continue to go into foreclosure as more and more subprime loans reset to higher interest rates in the immediate future (the OTS report estimates that 1.3 million American families with 2/28 and 3/27 mortgages are scheduled to reset by the end of 2008), Reich relied on a number of sources to support his point, including foreclosure numbers from RealtyTrac.
Reich used these figures to back up his claim that more than one foreclosure prevention plan is needed in order to assure lenders they will receive as much of their money back as possible given the current state of the nation’s economy.
“We continue to stress that prudent workout arrangements conducted in accordance with safe and sound lending practices, are generally in the long-term best interest of both borrowers and lending institutions,” Reich said in his report.
Unlike workout arrangements, loan modifications — by contrast — are not working as well as originally anticipated. Reich pointed to the FHASecure program as an example, where 116,000 loans have closed since the program was launched in September 2007, but only 1,500 of them were made to refinance delinquent conventional loans.
Now with the new OTS plan, there are at least two options on the table to be considered. Although there are some similarities between the two plans, there are enough differences when it comes to the eventual outcome for lenders.
Under the FHA Housing Stabilization and Homeownership Retention Act of 2008 (the HSHR Act), the FHA proposes to guarantee up to $300 billion in new mortgages to refinance existing eligible mortgages originated between January 1, 2005 and July 1, 2007, the report notes. Loan-to-value ratio cannot exceed 90 percent of the current fair market value of the property, and FHA is requiring a 5 percent fee payable to it at the time of origination, PLUS an exit premium payable at the time the property is either sold or refinanced.
By contrast, the OTS Foreclosure Prevention Proposal does ask for FHA guaranteed loans for distressed borrowers in owner-occupied homes. Basing the loan on the current fair market value of the property is the same as well. Using the proceeds of the new FHA loan for existing loan holders via a short sale or a partial payment to pay off the existing mortgage is likewise similar.
However the way the two plans go about paying off the existing loan is where the similarities end.
The intent of their plan, the OTS says, is to “provide a negative equity position to the original loan holders in an amount equal to what they are giving up by taking the partial pay-off or short sale from the proceeds of the new FHA-guaranteed loan.”
In essence, the OTS believes that the FHA backed plan allows for the possibility of a windfall to the borrower down the road, by enabling him to recoup the entire gain on the sale of the property after five years.
Under the OTS plan, however, there is no time limit on when the original loan holder can recover the amount of the initial shortfall. Basically, the OTS feels it is a proper incentive for borrowers to show responsibility and accountability for their financial affairs by allowing them to keep any proceeds in excess of the amount due the original loan holder upon the eventual sale of the property.
In either instance, borrowers who fell victim to the excesses brought on by the lending industry would have a viable option to get out from under a potential foreclosure and stay in their home, so long as they can continue to make timely mortgage payments.
The bottom line is: since neither of these plans has received outright approval by the federal government yet, the steady stream of foreclosures addressed by the OTS statement will continue forthright until such time as the problem works its way through the system — either bureaucratic or economic.
In the meantime, investors and potential home buyers have plenty of time to sort through an abundance of bargain properties nationwide that can satisfy their investment or personal lifestyle criteria.