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Published: January 2009

Bailout must include foreclosure prevention provisions

Coalition: Mortgage

Consumer Action, with its coalition members, sent a letter to Representatives Barney Frank and Spencer Bauchus of the House Financial Services Committee, asking them include a foreclosure prevention program in the Troubled Asset Relief Program (TARP), also known as the bailout legislation.

The Troubled Asset Relief Program (TARP) must include a foreclosure prevention program that requires those who receive funding to engage in streamlined loan modification efforts. This TARP program must be implemented quickly, whether through an agreement with the Obama Administration on core principles or through legislation consistent with the concepts in Title II of Chairman Frank's H.R. 384. The following core principles, aimed at achieving sustainable, broad-based loan modifications, are reflected in Chairman Frank's bill and are critical to any effort made through TARP to stem foreclosures:

Implement a quid pro quo policy for TARP funding.

Financial institutions that own mortgages or a mortgage servicing operation should not be eligible for TARP funds without agreeing to a foreclosure prevention program.

Provide incentives to servicers to modify loans.

The current compensation structure for servicers creates a perverse incentive for foreclosure rather than engaging in foreclosure prevention. Servicers are often not paid for modifications, but are reimbursed for foreclosure costs. Direct payments to servicers for substantive loan modifications should be made competitive with those for foreclosures and short sales. In addition to working quickly with the Administration to ensure that financial institutions receiving TARP funding - both already disbursed and yet to be disbursed - aggressively modify loans, Congress must also act quickly to remove some key obstacles to effective loan modifications.

Provide for meaningful protection for servicers when they modify loans.

Congress should protect servicers who avoid foreclosures by acting reasonably in modiffing or selling any loan under the Treasury program.

Provide that continued Real Estate Mortgage Investment Conduit (REMIC) status be contingent on modifying PSAs to allow for economically rational modifications.

Congress should provide that for trusts to retain their status (and future tax benefits) as REMICs, their PSAs must not restrict modifications that would benefit the investors as a whole.

Ensure income tax burdens do not undermine sustainability of loan modifications.

Congress should amend the law to remove the requirement to file Form 1099 with the IRS when canceling any mortgage-related debt and modifying the definition of "qualified mortgage debt" to include all mortgage debt, not just acquisition debt.

Increase foreclosure mitigation counseling to $600 million and legal assistance to $60 million.

Funding should be directed to the HUD housing counseling program and include a set-aside for organizational capacity building to fund staff management, internal training, technology, and equipment as well as community outreach to reach underserved and isolated borrowers. In addition, $60 million of funding should be allocated to attorneys at non-profit organizations providing foreclosure mitigation legal assistance, including foreclosure defense work.

Provide for judicial modification of loans. It is critical to provide a backstop to protect those homeowners whose lenders cannot or will not agree to voluntarily modify their loans, either through the TARP initiative or otherwise, when the homeowner could sustain a market rate mortgage.

The best and only solution in these cases is to lift the ban on judicial modifications and allow a bankruptcy court to implement an economically rational solution that otherwise would be lost. Modiffing loans to prevent foreclosures is good for investors, homeowners, the communities, and the economy.

Lead Organization

ACORN

Other Organizations

ACORN | AFL-CIO | Center for American Progress Action Fund | Center for Responsible Lending (CRL) | Consumer Federation of America | Consumers Union | Greenlining Institute | Lawyers' Committee for Civil Rights Under Law | Leadership Conference on Civil Rights (LCCR) | National Association of Consumer Advocates Q.{ACA) | National Association of Consumer Bankruptcy Attorneys | National Community Reinvestment Coalition (NCRC) | National Consumer Law Center (on behalf of its low-income clients) | National Council of La Raza O{CLR) | National Fair Housing Alliance O{FHA) | National NeighborWorks Association | PICO National Network | National Training and Information Center | Public Citizen | U.S. PIRG

More Information

ACORN's Stop Foreclosures Campaign

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