Monday, February 20, 2012

Preventing Preventable Home Foreclosures: The Home Mortgage Bridge Loan Assistance Act of 2012

By Robert Hockett

As most of our readers know, and as a perhaps larger proportion of them than that of the nation at large, thanks to Neil, likely have known since at least 2007, sagging mortgage markets continue to act as a drag on our still underperforming economy. The White House and Congress were perhaps not as quick to catch on as we might have wished, though admittedly there have been several efforts, commencing with HAMP and HARP, to turn things around over the past several years. To the surprise of many in Washington, however, initiatives thus far attempted have yielded but modest results. (Let us hope that the latest refinancing initiative, along with future such initiatives applicable to Fannie- and Freddie-held mortgages, will fare better.)

One factor that might account at least partly for the less than stellar successes of mortgage market repair efforts thus far attempted is their 'one size fits [nearly] all' character. For as it happens, different subsectors of the mortgage sector face quite distinct challenges. This is one tentative conclusion that Dan Alpert, Nouriel Roubini and I reach in our recent white paper, The Way Forward,  about which Neil kindly wrote at this site late this past autumn - . If we are right about this, then disaggregating mortgage market repair efforts along lines more or less isomorphic to the 'subsectoral' divisions to which I refer should improve their performances. In this post I wish to draw attention to one such subsector, and to a program that's well adapted to its distinct challenge.

It will be well here first briefly to elaborate on the full set of 'subsectors' to which I refer.

So, it should probably first be admitted that some (doubtless comparatively few, but nevertheless plenty of) mortgagors really are mortgagors simply in owing to the unusual circumstances that prevailed during the residential real estate bubble of the late 1990s and early 2000s. Under normal conditions, these folk would likely have been renters, and so it might be the case that only conversions of present mortgages to 'rent with a view possibly to owning' arrangements will serve best to spare them foreclosure at present. The idea here would be to face certain evident facts about some mortgagors' capacity to own under non-bubble conditions, without for all that falling too quickly for the 'baby out with the bathwater' line taken by many who mistake the crisis for 'proof' that the American fixation on home-owning tout court is ill-conceived. A plan along these 'rent to own' lines is sketched for this subsector in the aforementioned Way Forward.

Other (surely the great majority) of troubled mortgagors likely would have been mortgagors not only under bubble conditions, but also under more longterm trendline conditions of the sort that prevailed prior to the bubble years before the crash, but now find their mortgages 'under water' in owing to the fixed rates of their debts as compared to the variable rates - which last 'varied' downward from 2007 onward - of their residential assets. For many of these mortgagors, conditional principal write-downs accompanied by potential-appreciation-sharing agreements and bank capital-regulatory forbearance arrangements might well ultimately prove necessary. Here too a detailed plan along the requisite lines is mapped in The Way Forward.

Yet another subclass of mortgagors, however, seems to have been overlooked in comparison to those two just mentioned (though The Way Forward aims to give them their due too). These are mortgagors, some of whose mortgages might be under water but many of whose might not, who are experiencing only temporary difficulty keeping current on their monthly payments owing to slump-induced un- or underemployment. Because only 60 days' delinquency are needed for many mortgages to go into default and foreclosure, people in this subclass face the prospect of losing their homes, both to their own detriment and to that of their lenders and neighbors and markets more generally, notwithstanding the fact that they will surely be able to resume payments within a mere matter of months. And owing to rigidities in many (especially securitized) mortgage contracts, even widely recognized would-be value-maximizing temporary forbearance in such cases is often foreclosed (sorry, pun intended).

In the face of this class of avoidable tragedy, my friend and colleague Michael Campbell and I have drafted a bill that we now have reason to hope and believe (a) will soon be enacted into law here in New York, and (b) might serve as a template for similar provisions both in other states and even at the federal level. It is called the Home Mortgage Bridge Loan Assistance Act of 2012 (HMBLAA), and has already received the endorsement of the New York City Bar Association, to whose Committee on Banking Law we both belong (Michael is the Chair), the New York State Bar Association, and now the New York Bankers Association. (A link to the draft bill, along with a white paper more fully explaining it, is below.)

It is not altogether surprising that our proposal has garnered so much support. In a sense, it is one of those proverbial 'money on the table' opportunities. The program sidesteps an obvious market failure, and does so by means that are rather more orthodox than would be entailed by another partial solution to the mortgage crisis I've proposed here at DoL before.  In so doing, it benefits lenders and borrowers alike, not to mention neighborhoods, the housing stock, the mortgage markets and thereby the macro-economy. Yet it costs the state next to nothing since the bridge loan assitance that it provides is repaid in full. Such is the lesson, at any rate, offered by an early rendition of a similar program pioneered in Pennsylvania during the imports-induced steel slump and Reagan recession of the early 1980s - viz. the Home Emergency Mortgage Assistance Program (aka 'HEMAP'). HMBLAA builds upon the lessons learned from the 30-year HEMAP experience, and offers CRA credits to banking institutions that assist with provision of seed moneys to jump-start the program. Once up and running, HMBLAA should be financed nearly in full by bridge loan repayments made by the beneficiaries themselves.

We have received a good deal of constructive criticism and suggestion from attorneys and bankers in the private, as well as the public sector, but could still do with more. I accordingly link to the draft bill, as well as to a white paper we've written in support of it, complete with regulatory impact analysis supplied by colleagues at the New York Fed where I moonlight most Fridays and weekends, here:


White Paper.

Please let us know what you think!