Woodstock has consistently advocated for policies that better serve underwater homeowners. Negative equity has been shown to contribute significantly to the foreclosure crisis, and is a serious drag on Illinois’ housing market. In Illinois, more than 25 percent of homeowners are underwater or nearly underwater. The proposed housing programs have a number of provisions meant to ease the burdens of underwater homeowners.
For one, the new FHA refinance program makes it much easier for underwater homeowners with non-GSE-backed loans to access a lower interest rate, saving an estimated 3.5 million homeowners an average of $3,000 per year. While this would make monthly payments more affordable and free up income for other needs, it would not necessarily address the factors that encourage underwater homeowners to default. A proposed change to both HARP and the FHA programs would allow homeowners to refinance into a 20-year loan and use the savings from a lower interest rate to build assets through home equity, which could be an attractive option to some homeowners who are not too deeply underwater. The Obama administration indicated that their proposed legislation would require banks to write down principal on loans with more than 140 percent loan-to-value ratios before accepting them into the FHA refinance program, which would provide much-needed relief to the most deeply underwater homeowners. Homeowners with GSE-backed loans and who are less deeply underwater make up a significant portion of the marketplace and policies to stabilize those loans are still a missing piece of the puzzle.
The Home Affordable Modification Program (HAMP) is also undergoing an overhaul. In recent weeks, Treasury announced that it will expand HAMP eligibility, triple incentives for servicers to write down principal, and extend the program into 2013. Treasury noted that the extra incentives would be available for loans backed by the GSEs, if their conservator, the Federal Housing Finance Agency, permits. We encourage the FHFA to seriously reconsider its hard-line stance against principal reductions in light of this news. Additionally, we are heartened that HAMP is now available to owners of rental properties and to homeowners with overall debt loads greater than 31 percent of their incomes, but whose payments on their first mortgages are less than 31 percent of their monthly income.
Prior to these HAMP changes, few resources were available to owners of rental buildings. Keeping rental buildings out of foreclosure is critical to keeping neighborhoods stable and preserving affordable housing. Our data show that, in the Chicago six-county region, nearly 3,000 multi-family rental buildings went into foreclosure in the first half of 2011. These HAMP changes open up new resources to people with substantial debt on a second mortgage or medical debt, for example, that makes them likely to default, even if their first mortgage payment is considered affordable.
The new FHA refinance program and other initiatives, such as a homeowner’s bill of rights including uniform servicing standards that would end the dual track of pursuing foreclosure and home retention actions simultaneously, require Congressional approval. These crucial measures should not fall victim to the intense partisanship and obstructionism displayed by Congress in recent history. Indeed, Rep. Scott Garrett, who chairs the House subcommittee concerned with the GSEs, has declared that the mechanism to fund the FHA refinance program—a fee levied on the biggest banks—is “dead on arrival.” Housing’s struggles pose significant barriers to an economic recovery, and these reforms would move us in the right direction. Congress must work together to make these plans a reality.