Senators Urge 90-Day Timeout On Mortgages Held In Companies’ Portfolios
WASHINGTON, DC—U.S. Senators Charles E. Schumer (D-NY), Robert Menendez (D-NJ), Sherrod Brown (D-OH) and Bob Casey (D-PA) today called on the newly tapped chief executives of Fannie Mae and Freddie Mac to put an immediate and temporary freeze on foreclosures on all loans held by the companies. The freeze would serve as a stopgap measure until the two companies, which were taken over by the U.S. government in an emergency rescue plan announced by Treasury officials last weekend, can perform wholesale loan modifications allowing millions of Americans to keep their homes.
“These are mortgages held in their entirety by Fannie Mae and Freddie Mac, and can be modified with little or no limitation. This action would provide immediate relief to many homeowners and, as importantly, give each GSE a further opportunity to turn these non-performing loans into performing assets to minimize losses,” the senators wrote.
In their letter, the senators called on Fannie Mae and Freddie Mac to declare a temporary moratorium of at least 90 days on all impending foreclosure proceedings on whole mortgages held within the firm’s portfolio. This “timeout” would give the GSEs an opportunity to modify those troubled loans. The senators said there was precedent for the companies to undertake an aggressive workout program. Since July, FDIC Chairwoman Sheila Bair has initiated modification programs with banks that have gone into receivership; the senators said today that Fannie and Freddie, which are now under government control, should adopt a similar approach.
Even prior to Bair’s action, top regulators like Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson had urged private lenders and servicers to perform loan modifications to help keep families in their homes and turn mortgages into performing assets under the so-called “HOPE NOW” program. The senators said Thursday that the government could now act in that same spirit by urging workouts at Fannie and Freddie.
“A more proactive change in Fannie Mae and Freddie Mac policies regarding loan modifications would not only help homeowners and the housing market more generally, but would benefit the firms, and could limit any costs to the federal government by transforming non-performing loans into performing assets with stable, long-term cash flows,” the senators said.
Modifying at-risk mortgages benefits both the families facing foreclosure and maximizes the value of the mortgage asset. According to Chairwoman Bair, a foreclosed mortgage pays $0.30 on the dollar whereas a mortgage that is modified to be affordable for the homeowner typically pays $0.90 on the dollar while allowing families to remain in their homes.
A copy of the senators’ letter appears below.
September 11, 2008
Herb Allison
Chief Executive Officer
Fannie Mae
3900 Wisconsin Ave NW
Washington, DC 20016-2892
Dave Moffett
Chief Executive Officer
Freddie Mac
8200 Jones Beach Drive
McClean, VA 22102-3110
James B. Lockhart III
Director
Federal Housing Finance Agency
1700 G Street, NW
4th Floor
Washington, DC 20552
Dear Director Lockhart, Mr. Allison and Mr. Moffett
We are writing to you today to urge you, in your capacities as the Conservator and CEO’s of Freddie Mac and Fannie Mae, to reverse certain policies of your predecessors and use your roles as the leading players in the mortgage market both to help victims of the housing crisis save their homes, improve the fiscal well-being of your firms and stabilize housing prices by reducing the excess supply of homes on the market.
As you are well aware, the housing crisis continues to devastate too many American families. As a result of declining home values, questionable lending practices and a deteriorating economy, millions of borrowers find themselves facing foreclosure and improving portfolio performance and long-term value. In many instances, these homeowners could remain in their homes and their loans could once again become performing assets through a loan modification. Congress, Secretary Paulson, and Federal Reserve Chairman Bernanke have all encouraged lenders and servicers to facilitate such modifications where possible.
Though both Fannie Mae and Freddie Mac have taken preliminary steps to improve their modification policies, neither has gone as far as many private lenders and servicers in this regard. A more proactive change in Fannie Mae and Freddie Mac policies regarding loan modifications would not only help homeowners and the housing market more generally, but would benefit the firms, and could limit any costs to the federal government by transforming non-performing loans into performing assets with stable, long-term cash flows. The FDIC’s experience shows that a foreclosed mortgage pays $0.30 on the dollar in the current environment, whereas a mortgage that is modified to be affordable for the borrower typically pays nearly $0.90 on the dollar. Clearly, modifying at-risk mortgages maximizes the value of these assets.
First, we are calling on Fannie Mae and Freddie Mac to declare a temporary moratorium of at least 90 days on all impending foreclosure proceedings on whole mortgages held within each firm’s portfolio, and to conduct an immediate and thorough review of those mortgages. These are mortgages held in their entirety by Fannie Mae and Freddie Mac, and can be modified with little or no limitation. This action would provide immediate relief to many homeowners and, as importantly, give each GSE a further opportunity to turn these non-performing loans into performing assets to minimize losses.
Second, we are asking that both Fannie Mae and Freddie Mac revisit their policies and practices governing modifications involving Mortgage Backed Securities [MBS] issued by the respective agencies. In the case of Fannie Mae in particular, according to the servicing guidelines that govern Fannie Mae MBS, loans can only be modified if they are delinquent for 120 days, at which point the servicer must purchase the loans whole from the MBS prior to modification. There is little question that both of these requirements significantly reduce the likelihood that problematic loans will be modified. In particular, requiring four months of delinquency only furthers the likelihood that homeowners will be forced into foreclosure. Though the introduction of the HomeSaver program has brought some relief, a true loan modification remains far more preferable to an additional loan made to a delinquent borrower.
Given that Fannie Mae and Freddie Mac are already guaranteeing the loans in Fannie Mae- and Freddie Mac-backed MBS, there seems little justification under conservatorship for maintaining these and other policies that limit loan modifications, which serve the dual purposes of keeping families in their homes and of maximizing the overall value of these mortgage assets. These changes would have the additional benefits of reducing risks to taxpayers and alleviating the downward pressure on housing prices which threaten all homeowners regardless of the type of loan they have or who owns that loan. We urge both of you to take whatever actions are necessary to facilitate the changes in your policies and practices so that more American families do not have to suffer the economic and personal disaster of foreclosure.
We thank you for your prompt attention, and look forward to your response.
Sincerely,
Charles Schumer
United States Senator
Robert Menendez
United States Senator
Sherrod Brown
United States Senator
Robert Casey
United States Senator
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