Yesterday, the Obama administration released the general outlines of its Homeowner Affordability and Stability Plan, which is intended to curb foreclosures and support plunging housing prices. Details are promised by March 4. (Ballard Spahr will hold a teleconference on the plan shortly after that.)   The central elements include (1) providing additional capital to Fannie Mae and Freddie Mac and allowing them to hold additional loans in their portfolios; (2) allowing borrowers who have Fannie Mae and Freddie Mac mortgages with high LTV ratios to refinance their loans at lower, current market rates; (3) providing $75 billion in government funding to support modifications to qualifying mortgages; and (4) affording new cramdown powers to bankruptcy courts. A summary of those elements follows.

Fannie Mae/Freddie Mac Support. The two companies will receive $200 million in new capital (outside the TARP program) and will be allowed to expand the size of their portfolios by $50 to $900 billion. The announcement does not explain why the high-end estimate of $900 billion is 18 times the low-end estimate of $50 billion and why a narrower range could not be given.

Refinancings. Four to five million borrowers with conforming mortgage loans that have LTV ratios exceeding 80 percent and are owned or guaranteed by Fannie Mae or Freddie Mac will be able to refinance at lower, current rates. Borrowers whose loans are held by other parties and, reportedly, borrowers with LTV ratios exceeding 105 percent will not receive refinancing assistance.

Modifications. Three to four million delinquent and at-risk homeowners will qualify for mortgage modification assistance at an estimated cost to the government of $75 billion. In addition to the inherent uncertainty of estimating the cost of assistance on a known universe of qualifying loans, there is a hot debate within the administration over which loans will qualify, according to The Wall Street Journal. The administration statement on the plan stated that it would apply to loans held by any financial institution that receives new TARP funding. However, it went on to state that the plan would apply to loans held by all federally insured depository institutions (not just those receiving new TARP funds) and to loans owned or guaranteed by Fannie Mae and Freddie Mac. While the statement vowed that the administration would work "to implement these guidelines across the entire mortgage market," the plan does not promise a safe harbor or other protection to companies that fear investor lawsuits if they modify loans they are servicing.

A borrower will not be eligible for a modification if the cost to the lender, after taking into account government financial assistance, is deemed higher than the cost of foreclosure. No details were released concerning how this determination will be made.

The lender will be expected to reduce mortgage debt service to 38 percent of income by lowering interest rates, and the government and the lender will then share the cost of further rate reductions to lower the debt service to 31 percent of income. After five years, rates may gradually increase to pre-modification levels. 

The government will provide incentives for mortgage modifications: (1) $1,000 to the servicer for each eligible modification meeting plan guidelines; (2) up to an additional $1,000 per year to the servicer, for up to three years, as long as the borrower remains current; (3) $1,500 to the mortgage-holder and $500 to the servicer for each nondelinquent qualifying mortgage that is modified; and (4) up to $1,000 per year to the borrower, in the form of principal reductions, for up to five years. The FDIC will also provide up to $10 billion of protection against the risk that lenders will incur additional losses due to subsequent declines in the value of properties securing modified mortgages. 

Bankruptcy Cramdowns. As the threatened "stick" in the plan, the administration will support legislation allowing the cramdown of owner-occupied mortgage loans in bankruptcy. In a cramdown, the secured claim of a mortgage lender is reduced to the value of the home securing the loan and the remainder of the claim is converted to a separate, unsecured claim, which typically has little or no value. Cramdowns would be available only to borrowers who have mortgages under the Fannie Mae and Freddie Mac conforming limits and have cooperated with their servicers in efforts to modify their loans. Also, in apparent response to concerns regarding the potential loss of FHA/VA insurance or guarantee protection as a result of a cramdown or voluntary modification, the plan states that the administration will seek legislative changes to avoid such losses.

Ballard Spahr's Consumer Financial Services Group regularly counsels mortgage lenders and servicers regarding federal and state laws affecting their businesses, including responses to the economic crisis. For further information, please contact Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; or Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com.


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This newsletter is a periodic publication of Ballard Spahr LLP and is intended to alert the recipients to new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and specific legal questions you have.