Policy Briefings

“Do you have any questions?”

vs.

“What questions should we be asking?”

Policy Briefing:Loan Modifications

GCI Civic Leadership Workshop

April 2, 2011

The Problem: Borrower Distress

Loan Modification Program (HAMP)

General goals:Targets borrowers at risk of imminent default:

Created in February 2009 Designed to help homeowners

stay in their homes by providing a consistent framework for mortgage modifications.

It gives incentives to servicers to reduce monthly payments to borrowers.

Eligible owners can have their monthly mortgage payments reduced to 31% of income.

• In default or foreclosure• Borrowers who are current on

their loans but are struggling to make payments may also be eligible for HAMP if they:– Have a documented hardship

– decrease in income, increase in expenses, facing interest rate increase within the next four months, etc.

– Do not have sufficient savings or other liquid assets to make future payments.

Loan Modification Program (HAMP)

The HAMP Waterfall

• Servicers must apply the sequential steps (“The Waterfall”) as needed to cut loan payment to 31% of eligible borrower’s monthly pre‐tax income.– Capitalize outstanding interest,

escrow advances, out‐of‐pocket servicing expenses (no late fees)

– Cut interest rate to as low as 2%– Extend loan term up to 40 years– Defer portion of principal,

interest‐free, until loan is paid off

Accrued interest and expenses are tacked onto extended loan terms; any principal forbearance is set as a balloon payment.

Loan Modification Program (HAMP)

Servicers apply NPV formula: Outcomes:

• NPV is a mathematical model used to analyze the cost/benefit of investment decisions

• MHA NPV factors include:– Home value relative to

mortgage amount– Likelihood of foreclosure– Home price trends– Cost of foreclosure and cost of

modification– Default rate and discount rate

• Fannie Mae and Freddie Mac Loans: Servicer must pursue modification whether the NPV calculation is positive or negative

• Non-GSE Loans:– NPV positive: Servicer must

modify loan– NPV negative: Servicer may

modify loan but is not required to do so

Nick saves $65,580 in the first five years

Recent Additions

HAMP Principal Reduction Incentives

FHA Principal Reduction Program

• Promoting principal forgiveness within HAMP requirement that servicers consider “principal relief” including write-downs.

• Pay-for-success structure tied to loan-to-value. For reductions below 115%, the payment increases to 21 cents on the dollar.

• The write-downs are to take three years, with the borrowers in essence being rewarded for making their payments on time.

• Principal reduction initiative geared toward borrowers with 115% or higher loan-to-value (LTV) ratios.

• Investors will write down the loans to 97.75 % of the appraised value, at which point FHA. will refinance them through new lenders.

• After refinance, the combined first mortgage and any secondary liens cannot surpass 115% of the current value of the home.

Recent Additions

2nd Lien Program (2MP) Short Sales (HAFA)

• Eligibility:– First mortgage is modified

through HAMP– 2nd lien lender is participating

in 2MP• 2nd lien originated on or

before January 1, 2009• Borrower must consent to

share 1st mortgage modification data with 2nd lien lender (if the lenders are different)

• Provide financial incentives to lenders, servicers and borrowers to allow a property to sell for less than the outstanding mortgage (“short”)– Borrowers would receive $1,500

from the government in relocation expenses.

– Servicers receive $1,000.– Second liens holders can receive

up to $3,000 of the sales proceeds for releasing their liens.

– First lien investors can receive $1,000 from the government for signing off on payments to subordinate lien holders.

Recent Additions

Hardest Hit Fund (HHF)

• HHF provides $445 million in federal funds to assist Illinois homeowners dealing with job loss or income reduction.

• Illinois’ program - the “Hardest Hit Fund’s Homeowner Emergency Loan Program” (HHF HELP) - will assist LMI families with temporary mortgage assistance while they work to regain sufficient income to pay their mortgage.

• HHF HELP aims to reduce the number of mortgage delinquencies and avoidable foreclosures caused by unemployment and underemployment and to preserve homeownership for Illinois’ moderate and low income families.

• IHDA is not currently accepting any applications, but anticipates opening the application period during the spring/summer of 2011.

DO THESE PROGRAMS WORK?

Disposition of Canceled HAMP Trial Modifications (as of September 2010)

Characteristics of Modified Loans

 Characteristics Value (mean or percent)Origination FICO  614Home purchase 45%ARM 88%Interest Only 24%30- or 60-day delinquent when mod 19%90-day delinquent when mod 42%

Loan ModificationUnpaid balance before mod $235,673 Unpaid balance after mod $240,659 Interest rate before mod 8.88%Interest rate after mod 6.82%P&I payment before mod $1,746P&I payment after mod $1,498Payment higher after modification 53%

Based on a dataset of 51,674 loan modifications reported from 01/2008 to 11/2008

Principal Reduction Has the Lowest Re-default Rate

(Estimated 9-months FC Rates in Different Markets)

Note: * Sand states include CA, FL, NV, AZ. All loan mods result in a payment reduction from 50% DTI to 31% DTI. 

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Sand States Other markets Overall

Traditional

Rate reduction

Rate and principal red

Principal reduction

Obstacles to principal reduction

• Investors– Principal reductions force losses onto different classes of

investors – produces resistance or legal actions (Countrywide).– Sheer numbers of investors make agreements difficult to reach.

• Servicers– Friction from securitization - “pooling & service agreements”

transfer responsibilities for problem loans to mortgage servicers.– Servicer compensation tied to loan balance – produces a

disincentive for principal reductions.

• Moral hazard– By making it less costly for borrower to default, e.g., reducing

the principal owed, principal reductions may result in more defaults than otherwise would have occurred.

Policy Briefing:Neighborhood Stabilization Program

GCI Civic Leadership Workshop

April 2, 2011

THE PROBLEM: REONeighborhood Stabilization Program:

Background

NSP-1• Title III of Division B of the

2008 Housing and Economic Recovery Act, (HERA).

– Section 2301-Emergency Assistance for the Redevelopment of Abandoned and Foreclosed Homes, aka “Neighborhood Stabilization Program”

– $3.92 billion allocation, with amounts determined by formula established by HUD using criteria specified by HERA

– Treated as CDBG Funds under Title I, but alters several key CDBG provisions.

NSP-2• References NSP funds

authorized under the American Recovery and Reinvestment Act (ARRA) of 2009.

– Allocates $1.93 billion on a competitive basis to states, local governments, and non profit organizations.

– Program objectives and eligible uses did not change, but the allocation process and some regulations on the funds have changed.

– Also includes a further $50 million for technical assistance (NSP-TA).

Background

Eligible Uses

• NSP funds may be used for activities which include, but are not limited to:

– Establish financing mechanisms for purchase and redevelopment of foreclosed homes and residential properties;

– Purchase and rehabilitate homes and residential properties abandoned or foreclosed;

– Establish land banks for foreclosed homes;

– Demolish blighted structures; – Redevelop demolished or vacant

properties

Requirements

• NSP grantees must use at least 25 percent of the funds to house individuals or families whose incomes do not exceed 50 percent of the area median income.

• All activities must benefit low- and moderate-income persons whose income does not exceed 120 percent of area median income.

• Money has to be obligated within 18 months.

The Neighborhood Stabilization Program, a CDBG Component

Uses of NSP Funding

Five eligible uses

• Purchase and rehabilitate residential properties to sell, rent, or redevelop

• Create financing mechanisms for purchase & redevelopment

• Establish land banks

• Demolish blighted structures

• Redevelop demolished or vacant properties

Eligible activities

• Acquisition • Disposition• Eligible rehabilitation and

preservation activities, for homes and other residential properties

• New construction• Clearance, for blighted

structures only • Relocation• Direct homeownership

assistance• Housing counseling (for end

users only)

LOCAL REQUIREMENTSNeighborhood Stabilization Program:

Local NSP Targeting

• All funds must serve households less than 120 Percent of Area Median Income.

– HOME Program “Safe Harbor” – allows PJs to exceed CDBG limits– Area Benefit: This requirement can be met by targeting funds to

neighborhoods where more than 51% of persons are less than 120 percent of Area Median Income.

• VLI set-aside: 25% of funds must go to serve individuals or households less than 50% of Area Median Income.

– Area benefit DOES NOT APPLY for this group. You can only meet this requirement by providing direct assistance to a person or household with income less than 50 of Area Median Income.

• Must target areas with greatest needs due to foreclosure crisis.

• The statute also provides direction to grantees that they should give priority emphasis in targeting the funds that they receive to “those metropolitan areas, metropolitan cities, urban areas, rural areas, low- and moderate-income areas, and other areas with the greatest need, including those—

– with the greatest percentage of home foreclosures;

– with the highest percentage of homes financed by a subprime mortgage related loan; and

– identified by the State or unit of general local government as likely to face a significant rise in the rate of home foreclosures.” (2301(c)(2))

Local NSP Targeting

• Get the biggest bang for your buck – program goal setting:

– Identify neighborhoods with a problem• HUD’s “predicted risk” data on HUD website (on same file with area benefit

information)• Local data on bank and tax foreclosures• Local data to show if a home is vacant, such as water utility data

– Develop a Strategy for Immediate Impact• Use flexibility under land banking activity to maintain abandoned properties

you have not yet acquired (legal authority to maintain properties must be local, but NSP funds can be used to pay for the maintenance under certain circumstances)

– Prioritize neighborhoods for different uses of funds• Preservation neighborhoods – acquire and resell• Opportunities for mixed income affordable housing – acquire and rent• Shrinking neighborhoods – acquire or swap and demolish

Local NSP Targeting

The Neighborhood Stabilization Program, a CDBG Component

Affordability Periods

Rental properties

• Rehabilitation or acquisition of existing housing (investment per unit)

– Under $15,000 5 years

– $15,000 to $40,000 per unit 10 years

– Over $40,000, or rehabilitation involving refinancing 15 years

• New construction 20 years

Owner-occupied properties

• Amount of permanent per-unit subsidy:

– Under $15,000 5 years

– $15,000 to $40,000 10 years

– Over $40,000 15 years

CHICAGO’S PLAN(S)Neighborhood Stabilization Program:

Overview

NSP-1

• $55.2 million allocated by formula

• Funds available from 01/2009 – need to be spent by December 2010.

• Targets 25 of 77 community areas

• Estimated impact: 585 units

NSP-2

• Competitive program – Chicago submitted its $98 million bid in July 2009.

• Focuses on 12 community areas divided into three categories

• Estimated impact: ???

A seven-step process was developed for NSP1, as follows:

1. Map vacant properties and conduct research to refine redevelopment focus areas.

2. Establish purchase and sales agreements for Real Estate Owned (REO) properties.

3. Conduct feasibility analysis; choose properties; purchase properties.

4. Leverage funds, resources and partners to create housing, jobs, stabilization.

5. Market the properties; offer financing options; support sales or rental of finished units.

6. Monitor and evaluate the program.

7. Provide reports to HUD.

NSP Process & Adm. Structure

City of Chicago Objectives I

Given the scale of the foreclosure issue, its adverse impact on neighborhoods, the following neighborhood stabilization goals have been established:

1. Stabilize neighborhoods by getting vacant and foreclosed homes up-to-code and occupied as quickly as possible.

2. Strategically target interventions to protect neighborhoods impacted by foreclosure, preserve public and private investments, and make a measurable impact in targeted areas.

3. Create efficiencies and economies of scale by acquiring vacant, foreclosed properties in bulk at a discount from lending institutions and redeveloping those properties with a broad network of qualified development partners.

4. Prioritize interventions on vacant, foreclosed 1-6 unit properties and other larger buildings that adversely impact neighborhood stability and quality of life in targeted areas.

5. Ensure compliance with affordability restrictions on rehabilitated homeownership and rental housing units.

- City of Chicago, NSP II Final Narrative

• The proposed NSP-2 plan would bring different levels of impact in the three neighborhood types:

– Green “growth” neighborhoods will bounce back quickly from the current crisis rather than suffering a prolonged downturn and loss of confidence.

– Orange “stability” neighborhoods will cut the bottom off their downward trajectories and stabilize around the targeted investment areas. These neighborhoods were chosen because their local markets are likely to collapse without strong and focused intervention.

– Yellow “caution” neighborhoods will consolidate investments on the strongest blocks near transit, St. Bernard Hospital and a college campus, and use demolition to reduce the negative impacts of blighted structures.

City of Chicago Objectives II

The City of Chicago identified 25 out of a total of 77 community areas as areas of greatest need, representing the top quartile of areas based on the following:

NSP 1

(1) foreclosures completed to become Real Estate Owned properties (REOs) per 1,000mortgageable properties in the area;

(2) percent of loans in each area that are high cost; and

(3) risk factors for rising foreclosure rates, including current price compared to 8-year maximum and unemployment rates.

Acquisition of Abandoned and Foreclosed Homes for Rehab

$26,562,500 425 units (150 @ 50% AMI, 275 @ 51-120% AMI).

- Rehabilitation for Rental $4,500,000 150 units (all @ <50% AMI).

- Rehabilitation for Homeownership

$4,125,000 275 units (all at < 120% AMI).

Acquisition of Blighted Structures for Land Bank

$4,500,000 100 units (all in areas with >51% of residents at or below 120% AMI).

- Demolition $2,000,000 100 units (all in areas with >51% of residents at or below 120% AMI).

New Construction $2,400,000 60 units (all @ <120% AMI). The units will likely be a mix of rental and homeownership units.

Homebuyer Financing/Loan Pool

$5,626,715 n/a

Planning and Administration $5,523,802 n/a

NSP-1 Proposed Activities

Proposed NSP Activities Sub-Totals Budgeted FundsA Establish financing mechanisms

for purchase and redevelopment of foreclosed-upon homes and residential properties

$8,111,171

B Purchase and rehabilitate homes and residential properties that have been abandoned or foreclosed upon

For-sale buildings: $40,555,856Rental buildings: $31,153,369Demolition: $ 2,737,350

$74,446,575

C Establish land banks for homes and residential properties that have been foreclosed upon

$0

D Demolish blighted structures $3,649,800

E Redevelop demolished or vacant properties as housing

$2,000,000

F Administrative costs (10% of total program costs $9,800,838

Total $98,008,384

NSP-2 Proposed Activities

Targeting NSP 2: 36 census tracts clustered in 11 community areas.

Targeting NSP 1: 25 community areas.

Targeting NSP 3: five areas of greatest need located within thefollowing community areas:

1. Belmont Cragin

2. Chatham

3. East Garfield Park

4. North Lawndale

5. West Pullman

Targeting: 36 census tracts clustered in 11 community areas.

Selected based on:- Scoring high on NSP-2 need scores (>18)- Need for public sector intervention- Capacity for a comprehensive approach based on an established plan

- Community capacity- Parallel capital investments

Census tracts were grouped into three types based on the challenges, market conditions and opportunities of each community