What is the FDIC proposing?

The FDIC is proposing that the Treasury Department could make Home Ownership Preservation (HOP) loans to borrowers with unaffordable mortgages to pay down up to 20 percent of their principal. In return for the 20 percent principal payment and avoiding a costly foreclosure, the mortgage investors would restructure the mortgage to ensure an affordable, long-term payment, pay the government's "cost of carry" for the first five years, and subordinate their lien interest to the government's claim. In this way, the public would be ensured repayment "off the top" if the borrower failed to pay. To give borrowers time to stabilize their financial situation and rebuild some equity, loan repayments would be delayed for five years and then amortized over the remaining life of the mortgage. To prevent gaming, eligibility would be confined to loans originated in recent years which were unaffordable at origination, based on a simple debt-to-income ratio.

What is the urgency of this program?

We are now undergoing a self-reinforcing cycle of default, foreclosure, home price declines, and mortgage credit contraction, the likes of which we have not experienced since the 1930s. The annual number of U.S. foreclosures nearly doubled between 2005 and 2007 to more than 1.5 million, and some private forecasts project 2 million foreclosures or more during 2008 if action is not taken now. Beyond their immediate costs, which include hundreds of thousands of displaced families and tens of billions of dollars in financial losses, these defaults and foreclosures are now resulting in wider problems for our communities and our economy.

Home prices in ten large U.S. cities fell on average by 13.6 percent in the year ending in February, and home price declines of more than 15 percent were registered in major metropolitan areas of California, Nevada, Arizona, Florida, and Michigan. A large inventory of unsold homes points to a protracted oversupply of homes. Of the net 6.6 million homes added to the U.S. housing stock since 2004, more than half are currently vacant. The problem is made worse by the difficulty of securitizing mortgage debt outside of the government-sponsored enterprises. The data show that private MBS issuance in the fourth quarter of 2007 was down 80 percent from the same quarter the year before, and originations of nonconforming loans financed by private mortgage backed securities (MBS) declined by similar amounts.

Because of the high costs associated with foreclosure (which can range up to 40 percent of the value of the property), it is in the interest of both borrowers and lenders to avoid this remedy whenever possible. But the progress of loan modifications to date has been too slow. A recent study indicates that seven out of ten seriously delinquent borrowers are not yet in any loss mitigation process, and that new loans are becoming delinquent faster than the servicers can modify them on their own.

Only the Federal government is in a position to help arrest the downward cycle in housing markets by facilitating temporary aid to borrowers facing financial difficulty and encouraging widespread restructuring of unaffordable mortgages into affordable ones. The situation in the housing markets is a national problem that affects all Americans. We must be prepared to apply government efforts now to shore up the economy through solutions geared to the scope of the problem, or we are likely to see this problem continue to grow.

How much will HOP loans cost the government?

The proposal is designed to result in no cost to the government. It requires full repayment of the HOP loan and its financing costs. Borrowers must repay their restructured mortgage and the HOP loan. Mortgage investors pay Treasury's financing costs to enter the program, and agree to concessions on the underlying mortgage to achieve an affordable payment. The government has no continuing obligation and the loans are repaid in full.

Who would be eligible for HOP loans?

The program could be limited to mortgages for owner-occupied residences that are unaffordable -- defined by front-end DTIs exceeding 40 percent at origination. In addition the loan could be required to be below the FHA conforming loan limit. Finally, the loans eligible for the program could be limited to those originated between January 1, 2003 and June 30, 2007.

Why only help people with unaffordable loans? Why not help everyone underwater?

HOP loans are designed to achieve widespread restructuring of unaffordable mortgages into affordable ones. By helping to stabilize the housing market, the program will help mitigate downward pressure on home prices to the benefit of all. The program is focused on borrowers with a long-term commitment to remain in their homes and pay their mortgages if they had an affordable payment. It is not designed to help borrowers who view home ownership as a leveraged investment. For those borrowers who must sell in the short term because of a job change, for instance, FHA refinancing would be another option.

What happens if a borrower needs to sell their home in the next year or so before home values stabilize? Will they need to bring cash to the sale of their home to pay off the government's loan?

If the borrower needs to sell the property, the government will be repaid off the top. As is always the case, the homeowner's entire mortgage debt would be due at the time of sale or refinancing. Homeowners will be no worse off than if they had not received a HOP loan -- and better off in that they were given an affordable mortgage for a period of time. Also, in this situation, the mortgage investor might well provide a short sale option and recognize the loss. In addition FHA would be another possible option for such borrowers.

This proposal is designed to help make unaffordable mortgages affordable, not to guarantee against home price declines. However, the stabilization of the mortgage markets that this proposal can help achieve will help stem the depth of that decline and help Americans rebuild equity in their homes over time.

Why would mortgage investors agree to participate in the program?

The program is based on the voluntary participation by mortgage investors. Mortgage investors would benefit from the modification to convert an unaffordable loan into a long-term, sustainable loan that avoids the considerable expense of foreclosure. The proposal also injects liquidity into the system and provides an accelerated payment for part of the loan.

What happens if the 20 percent payment from the HOP loan is not enough to achieve an affordable payment?

If the 20 percent HOP loan is not enough to achieve a 35 percent debt-to-income (DTI) payment for the borrower, it will be up to the mortgage investor to make additional modifications to the loan, such as by reducing the interest rate, to achieve this target DTI.

How would HOP loans be funded and how many people could they help?

A Treasury public debt offering of $50 billion would be sufficient to fund modifications of approximately 1 million loans that were unsustainable at origination. Under the program, principal and interest costs would be fully repaid, so that there would be no resulting cost to the government.

 
Does this program create a new bureaucracy to process these applications, decide priorities for participation, and monitor compliance?

No. Mortgage investors would apply to Treasury for funds and would be responsible for complying with the terms for the HOP loans, restructuring mortgages, and subordinating their interest to Treasury. They would also consent to periodic audits by bank regulatory agencies.

Who will ensure compliance by mortgage investors?

Federal banking agencies will audit compliance as part of their overview of the servicing operations of regulated banks. State authorities will audit those who report solely to the states.

Describe the mechanics of how the Treasury gets its money back and why there is no cost to the government.

Treasury would have a super-priority interest -- superior to mortgage investor's interest -- to guarantee repayment. If the borrower defaulted, refinanced or sold the property, Treasury would have a priority recovery for the amount of the HOP loan from any proceeds. In order to enter the program, mortgage investors would pay the first five years of interest due to Treasury on the HOP loans. After 5 years, borrowers would begin repaying the HOP loan at fixed Treasury rates.

How does this proposal compare to the FHA refinancing proposal under discussion in Congress?

The current problems in the mortgage market are the results of many complex causes, so no single solution will address all of the problems. The HOP loan program would address a different set of borrowers than the FHA refinancing proposal. It would complement rather than compete with other proposals. The FHA proposal would be especially helpful to borrowers who cannot refinance because they owe significantly more than the current value of their home due to declines in housing prices. The HOP loan proposal would be helpful for situations where a relatively simple loan modification and interest rate reduction could create a long-term, affordable loan for a borrower. The HOP loan also would address the problem of second liens by retaining the loan in the mortgage pool, retain the risk of default with the mortgage investors, and would impose no costs on the government.

 
How does the HOP loan program address the second lien issue?

Under the proposal, the underlying loan is modified within the mortgage pool and does not worsen the position of subordinate lien holders.

Does the HOP loan program require Congressional action?

Implementation of the program requires congressional action to authorize the Treasury to make HOP loans. The FDIC stands ready to assist Congress with technical assistance regarding the proposal.