Menendez Introduces Bill to Keep People in their Homes

I’ve made the comment on a number of occasions that, to date, we just don’t have any real answers to the foreclosure mess. Smarter people than me (that’s almost everyone) are starting to come up with ideas that may jumpstart matters in getting us out of this mess we’re in.

I choose not to debate any longer about whom we should blame, who deserves or doesn’t deserve a break, and who did or didn’t take advantage of the system. You folks that see graphite ropes snaking down from black helicopters with ninja-like warriors sliding into your backyard can debate that if you wish. Keep gathering those storable food and water stocks and guarding against the inevitable EMP that’s sure to end the world as we know it.

The fact is we need positive forward-thinking and a way to move forward. We need to be thinking about sensible solutions to what has the real potential to harm all of us for a long time. Whether you were affected by this mess, or were able to avoid it, it’s time to take the best action for moving forward. Did I mention “forward” movement?

One of the better ideas I’ve heard is the Menendez Bill introduced last week. It may not have all the answers and it may not make everyone happy, but it’s one of the first “out of the box” plans I’ve seen that meets the sensibility test in many ways. You may want to check it out; there are other plans out there and I suspect we will see other proposals that address shared appreciation loan modification plans that address homeowner/lender responsibility.

It’s time for innovative ideas and solutions. I offer the following from Senator Menendez’ web site as a possible launching platform:

Menendez Introduces Bill to Keep People in their Homes

Housing Chairman Continues His Fight to Help Underwater Homeowners

February 9, 2012

WASHINGTON, DC – U.S. Senator Robert Menendez (D-NJ), Chairman of the Senate Subcommittee on Housing, Transportation and Community Development, today introduced an innovative bill to keep families in their homes, despite their mortgage being worth more than their home.

“Unfortunately, far too many New Jerseyans are underwater on their mortgages and are all too familiar with the burden this brings. When you owe more than your house is worth through no fault of your own, relief can be hard to come by. More and more people are choosing to walk away, since they feel that’s their only viable option, which only exacerbates the problem,” Senator Menendez said. “My bill aims to break this cycle and give homeowners the relief they are looking for by working with banks to find acceptable solutions for everyone.”

The Preserving American Homeownership Act is specifically aimed at homeowners who owe more than their house is worth (“underwater”), which is currently estimated to be more than 10 million properties and approximately 22% of all homeowners. On average, these homeowners owe anywhere from $40,000-$65,000 more than their home is currently worth.

Millions of homes are underwater currently because of the broad national decline in home values that has occurred since 2006, which can be seen here. Because of this, homeowners – whose home values declined through no fault of their own – are less likely to remain in their homes, further hurting the already fragile market, and banks are reluctant to reduce the amount owed to them (“principal”) because they will be losing income.

Senator Menendez’s bill seeks to help both parties – homeowners and lenders – by creating a program in which banks reduce the mortgage principal for eligible homeowners. In exchange, banks would be entitled to a portion of the increased value of the home down the road as home values increase

President Clinton recently outlined a similar plan during the National Retail Federation’s Annual Convention and Expo as reported in the American Banker. Clinton said: “The lender would, in effect, invest in the home so the banks would not have a bad debt on their books,” Clinton said. “The harsh way to do it is to foreclose on everyone now and turn everyone into renters – I hate that way.”

“We applaud Senator Menendez for introducing The Preserving American Homeownership Act,” said Richard A. Smith, president and CEO of Realogy Corporation, a leading global provider of real estate and relocation services headquartered in Parsippany, N.J. “This debt-for-equity arrangement offers a solution for qualified underwater homeowners to work together with their lenders to achieve a mutually beneficial outcome — avoiding the lengthy and costly process of foreclosure, offering the likelihood of appreciation to both parties and contributing to a stabilizing housing market.”

“I’m a prime example of how shared appreciation mortgage modifications can really help homeowners,” said Juliana Collins who benefited from this specific modification previously. “When my house depreciated $200,000 in less than 3 years, it was a nightmare that I was unable to refinance my way out of. This modification finally gave me the peace of mind that not only will my family and I get to stay in our home, but I also won’t have to work multiple jobs and risk my health to be able to afford a mortgage that’s underwater.”

Chief Economist at Moody’s Analytics, Mark Zandi, on shared appreciation mortgage modifications: “I think [they’re] an excellent idea. … I do think [it] is appropriate – that there should be shared appreciation of any principal write down … but I think given that we’ve got this issue for the next three, five, seven years, I think this is entirely appropriate to do. Hopefully we learn from this and this will be part of the tool kit going forward.”

This program is a responsible win-win for everyone: underwater homeowners receive relief on their mortgages, while banks agree to take a short-term reduction for a long-term gain as the housing market recovers. In a similar program tested by a private mortgage servicer, almost 80% of homeowners who were offered the opportunity to participate chose to do so and had a re-default rate of only 2.6%.

Additional Details

• The principal balance of the loan would be reduced to 95% of the re-assessed value of the home and over a three-year period, provided the homeowner is able to make reduced payments, the principal balance would be reduced in 1/3 increments per year.

• In exchange, the bank would receive a fixed share (at most 50%) of the increase in the home’s value when the home is sold or later refinanced. The share depends on how much the bank initially reduced the principal. For example, if the bank reduced the principal by 20%, they would receive a 20% share of any later increase in the home price.

• Home values would be determined by independent third-party appraisers.

• Two pilot programs would be established by the FHFA and FHA for a length of two years for homeowner acceptance.

• Homeowners are eligible no matter how far underwater they are.

• Homeowners who are in default or foreclosure are eligible, but they must make timely payments on the modified mortgage going forward or they will not receive any principal reduction.

• Primary residences are eligible, but secondary residences and investment properties are not.

• If capital improvements are made to the home, homeowners will receive credit for the appreciation and banks will not receive a share of that appreciation.

Until next time…