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Published: January 2010

Foreclosure crisis can be stopped with bold, aggressive action

Coalition: Americans for Financial Reform

Consumer Action joined members of Americans for Financial Reform in a letter demanding more solutions - including revamping HAMP, addressing unemployed homeowners, and offering a "right to rent" - to stop the foreclosure crisis.

We need bolder and more aggressive action to respond to the still growing foreclosure crisis.  A successful program must help families keep their homes, repair the damage to neighborhoods, and restore the housing market as one stable basis of our economy. Homeowners face a range of problems – abusive loans, unemployment or significant income loss through underemployment, and catastrophic losses in value and homeowner equity. We need a range of solutions to respond to them.  

Solutions we recommend include: 

1. Make HAMP successful.

A. Stop foreclosures during HAMP reviews:
i. Halt foreclosure proceedings for borrowers that are in the loan modification process.  
ii. Require evaluation of qualification for loan modifications and other alternatives to foreclosure before foreclosure proceedings are initiated.

B. Provide additional modification tools: 
i. Principal reduction must be a real option, with appropriate incentives to ensure that this is the case. Principal reduction is the best solution for many borrowers, makes long term sense for investors in many cases, and makes it possible to help borrowers in Option ARMs. 
ii. Require Fannie Mae and Freddie Mac to implement principal reduction.
iii. Allow recipients of HAMP modifications to apply for subsequent further modification evaluations if changed life circumstances – such as unemployment - require it.
iv. Require that servicers must also offer modifications to people in bankruptcy.
v. Clarify that assumptions of the mortgage are available where there has been a death, divorce or similar life event.

C. Improve the modification qualification process:
i. Make the net present value (NPV) test transparent—create a web portal for homeowner use and make the full model available for review.
ii. Make the NPV test more accurate by using neighborhood data for vandalism discounts, foreclosure timelines, and REO sales timelines, in place of MSA or statewide data and use the actual cure rate as reported by Fitch; transform the NPV analysis so that it is a tool for  finding the set of loan terms that provide the highest net present value, and building modifications around that.
iii. Create an independent appeals process for homeowners who are denied, along with an ombudsperson to address complaints about the process.
iv. Require servicers to provide permanent modifications to eligible borrowers that submit full documentation.
v. Correct problems with HAMP borrower notice requirements, including instituting a requirement for more transparency and details when servicers cite investor restrictions as the reason for denial.

D. Share more lender performance data to ensure accountability for general performance and fair housing compliance:
i. Treasury and Freddie Mac must insure that servicers are fully complying with the data collection requirements and that there are consequences for servicers who do not comply.
ii. Treasury, DOJ and HUD must work quickly to analyze data for compliance with fair housing statutes and regulations.
iii. Data must be made available at the loan level in a manner that will allow the public to analyze program operations and results fully and objectively.

2. Use TARP funds to provide assistance to unemployed homeowners.

Given the high rates of unemployment in the current troubled economy, there is a need to create a program to assist unemployed homeowners who are unable to qualify for a HAMP modification, yet would ultimately be successful long-term homeowners. We therefore propose a supplement to the HAMP program focused on the unemployed.  Such a program could be broadly modeled on the successful Homeowners Emergency Mortgage Assistance Program (HEMAP) in Pennsylvania.  Key features of such a program would include providing grants or loans payable when homes are sold or refinanced or at the end of a 30 year mortgage to pay the difference between 31% of homeowners’ current income and the payment required for a neutral NPV loan modification for up to 24 or 36 months. 

3. Make loan modifications mandatory and require – and support – quality mediation programs

Congress should pass legislation requiring that loan servicers evaluate borrowers for loan modifications prior to foreclosing, with failing to do so being a legal defense against  foreclosure.  We should also consider legislative proposals that would support mandatory mediation programs using best practices.  Model programs include those in Philadelphia and the new ones launched in Maine and Nevada. 

4. Allow people who cannot stay in their homes as owners to remain as renters, or the ‘right to rent.’

For those families for whom foreclosure cannot be avoided even with appropriate assistance, we should consider establishing a Right to Rent program, which would give them the right to rent their homes at the market rate for a substantial period of time.  In November, Fannie Mae launched a similar "Deed for Lease" initiative, giving former owners the option to lease their foreclosed homes for as long as a year.  With a longer security of tenure (e.g. 5 to 7 years), Right to Rent would give homeowners more bargaining power when trying to work out mortgage modifications, resulting in more people avoiding foreclosure altogether.  In addition, by allowing families to remain in their homes, Right to Rent would alleviate neighborhood blight and preserve community stability.  Right to Rent is simple, can take effect immediately, and requires virtually no taxpayer dollars.

Lead Organization

Americans for Financial Reform

Other Organizations

Click here to see a list of Americans for Financial Reform members

More Information

Americans for Financial Reform

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