April 9, 2008
Comptroller Comments on Proposed FHA Housing Stabilization and Homeownership Retention Act of 2008
WASHINGTON — Comptroller of the Currency John C. Dugan told Congress today that the plan proposed in the FHA Housing Stabilization and Homeownership Retention Act of 2008 could provide another possible tool for helping banks avoid larger losses from foreclosure without raising significant safety and soundness issues.
"The concept," the Comptroller said, "is that the alternative would be less costly than foreclosure for many such loans" and "that it would allow borrowers to remain in their homes with lower mortgage payments."
The voluntary program has three elements. First, if the borrower and mortgage holder agreed and the borrower met certain criteria, the mortgage holder would reduce the principal to an amount that the borrower could afford. Second, the mortgage holder would accept a corresponding loss. Third, the mortgage would be refinanced into a new FHA-insured mortgage product at the lower amount.
"Because the program is voluntary, the Act could be a useful new tool, and safety and soundness considerations should be manageable," Mr. Dugan said.
The benefits realized by such a program depend on the extent to which borrowers and mortgage holders would actually choose this new option, according to the Comptroller. While lender and investor losses on foreclosures are typically about 40 percent, some circumstances exist where the new option may not be less costly than foreclosure, based on the amount of home price decline and the borrower's documented income.
A variable affecting the borrower's decision to choose this new option is the extent of "payment shock" they face, which may be less than anticipated as key interest rates that affect adjustable rate mortgages have dropped sharply this year. "Thus, more ARMs may be affordable than previously envisioned," Mr. Dugan said.
While the low rates may make some ARMs more affordable, recent declines in property value can result in "negative equity" where borrowers owe more than their houses are worth. According to Mr. Dugan, this negative equity appears to be "contributing significantly" to the current foreclosure problem.
The new program faces additional challenges where second mortgages are present. "When a borrower has insufficient equity in his or her home to cover first and second mortgages, the second mortgage holder's objectives and incentives are very different," Mr. Dugan said. "It will be essential to understand the concerns that second mortgage holders have and to identify incentives they regard as workable."
"Designing incentives that balance the needs of borrowers, lenders, and investors is a very complex and delicate task," the Comptroller concluded. "At the end of the day the more constructive the options that stakeholders have to address the prospect of foreclosure, the greater the chances that homeowners can remain in their homes."