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Rep. Maxine Waters, chairwoman of the Subcommittee on Housing and Community Opportunity and most senior member of the Financial Services Committee from the state of California, has introduced the Systematic Foreclosure Prevention and Mortgage Modification Act of 2008 (H.R. 7326).
The legislation is designed to dramatically reduce the number of foreclosures by establishing a systematic approach to modifying troubled mortgages. Mortgage servicers would be paid $1,000 for each modification, and the government would share up to 50% of any loss if a modified loan redefaults.
The cornerstone of the plan is the requirement that participating servicers must systematically review all loans in their portfolios. Each loan will be subjected to a net present value test to determine whether it is more beneficial to modify or to foreclose, and loans that would benefit more from modification must be modified.
Source: Office of Rep. Maxine Waters
To establish a systematic mortgage modification program at the Federal Deposit Insurance Corporation, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘Systematic Foreclosure Prevention and Mortgage Modification Act’.
SEC. 2. SYSTEMATIC FORECLOSURE PREVENTION AND MORTGAGE MODIFICATION PLAN ESTABLISHED.
(a) In General- The Chairperson of the Federal Deposit Insurance Corporation shall establish a systematic foreclosure prevention and mortgage modification program by–
(1) paying servicers $1,000 to cover expenses for each loan modified according to the required standards; and
(2) sharing up to 50 percent of any losses incurred if a modified loan should subsequently re-default.
(b) Program Components- The program established under subsection (a) shall include the following components:
(1) ELIGIBLE BORROWERS- The program shall be limited to loans secured by owner-occupied properties.
(2) EXCLUSION FOR EARLY PAYMENT DEFAULT- To promote sustainable mortgages, government loss sharing shall be available only after the borrower has made a minimum of 6 payments on the modified mortgage.
(3) STANDARD NET PRESENT VALUE TEST- In order to promote consistency and simplicity in implementation and audit, a standard test comparing the expected net present value of modifying past due loans compared to the net present value of foreclosing on them will be applied. Under this test, standard assumptions shall be used to ensure that a consistent standard for affordability is provided based on a 31 percent borrower mortgage debt-to-income ratio.
(4) SYSTEMATIC LOAN REVIEW BY PARTICIPATING SERVICERS- Participating servicers shall be required to undertake a systematic review of all of the loans under their management, to subject each loan to a standard net present value test to determine whether it is a suitable candidate for modification, and to modify all loans that pass this test. The penalty for failing to undertake such a systematic review and to carry out modifications where they are justified would be disqualification from further participation in the program until such a systematic program was introduced.
(5) MODIFICATIONS- Modifications may include any of the following:
(A) Reduction in interest rates and fees.
(B) Forbearance of principal.
(C) Extension of the term to maturity.
(D) Other similar modifications.
(6) REDUCED LOSS SHARE PERCENTAGE FOR ‘UNDERWATER LOANS’- For loan-to-value ratios above 100 percent, the government loss share shall be progressively reduced from 50 percent to 20 percent as the current loan-to-value ratio rises, except that loss sharing shall not be available if the loan-to-value ratio of the first lien exceeds 150 percent.
(7) SIMPLIFIED LOSS SHARE CALCULATION- In order to ensure the administrative efficiency of this program, the calculation of loss share basis would be as simple as possible. In general terms, the calculation shall be based on the difference between the net present value, as defined by the Chairperson of the Federal Deposit Insurance Corporation, of the modified loan and the amount of recoveries obtained in a disposition by refinancing, short sale, or real estate owned sale, net of disposal costs as estimated according to industry standards. Interim modifications shall be allowed.
(8) DE MINIMIS TEST- To lower administrative costs, a de minimis test shall be used to exclude from loss sharing any modification that does not lower the monthly payment at least 10 percent.
(9) 8-year LIMIT ON LOSS SHARING PAYMENT- The loss sharing guarantee shall terminate at the end of the 8-year period beginning on the date the modification was consummated.
(c) Regulations- The Corporation shall prescribe such regulations as may be necessary to implement this Act and prevent evasions thereof.
