[Myself and NCRC Board Member Morris Williams at NCRC's 2008 Annual Meeting in Washington paying for another years worth of NCRC membership]I am part of a team that has developed both a fair system of rescue and one that treats investors willing to mark to market with a degree of protection through a public private partnership powered by the authority contained in a OMB 76 [PDF version 63 pages] authorization with a r using SBA Standard Operating Procedure in awarding a multibillion dollar contract to a team [see previous entry] lead by a contractor team led by a current SBA 8 (a) Business Development Program Contractor through which we are developing the capacity to keep our communities running.
We will create a million American households and families in these communities who go to work part time every day, attend college, pay their mortgages and support our businesses, large and small.
If we preserve these homes and their households, we are preserving the economic engines that drive home investment in a million homes while investors and services will have income streams that will feed their net operating income.
I agree that we must stop the foreclosures because it is the right and correct thing to do.
THE WAY FORWARD: A COMMENTARY by Irvin Henderson
[current member of the Ad Hoc Steering board of the National Fairness and Growth Campaign and board member of the National Community Reinvestment Coalition and the National Trust for Historic Preservation along with serving as McGraw Daniels, Inc. {MDi} Treasurer and CFO and is President of Irvin M Henderson and Company]
It stands to reason that the best way to shore up all of our markets, credit and equity, is to ensure that the underlying assets are performing in the mortgage-backed securities that are the heart of this discussion. The purchase of the mortgages may still need to occur so that someone has the control to modify these mortgages. So we need broad, but targeted authority for a review board to modify mortgages whereby we see the potential for the family or individual to remain in the house and whereby there is an income stream that will at minimum support something near the original payment. In some cases this will mean that the interest rate must be lowered and in other cases, it might be that the term is extended. However, there will be very few cases where the principal actually has to be written down. The result will be securities that can be marked to market because we now know their true value. We know the following going forward:
• Principal that is supportable by the probable income stream of the borrower
• Interest rate that is supportable
• Term that is supportable
• Amount of subsidy required to stabilize the mortgage
Seemingly, this would eliminate the problem of the value of these mortgage-backed securities being drummed down to nothing when there are actual performing incomes behind them that have been verified and are projected to be consistent. The modification process will ensure this income and affordability. Banks, mortgage holders, investors and servicers will take the appropriate haircut, markets will stabilize, valuations will stabilize and financial statements can be trusted again. The credit market should liquefy within days of these actions.
We have a good example of how this type of mortgage modification could work. The Rural Development 502 program has mortgages over the years in which the interest rate is subsidized to increase affordability for rural homeownership. The subsidy is recouped at sale or at refinance. The wealth creation is not as preferable as non-subsidized mortgages, but this is a trade-off for affordability. In most cases today, the interest rate would not need large amounts of subsidy, but would need to be modified at the teaser rate or a rate that ensures affordability (no more than 32% of monthly income). An example would be an original payment of $1239 that morphs into $1791 at reset after a two year fixed rate mortgage becomes a 28 year variable rate mortgage. The original interest rate was 5%, and the amortization was 30 years. The reset rate is 9.5% and the term is 28 years. If this family can afford the $1239 for which they were originally underwritten (including taxes and insurance on a $175,000 mortgage), then their mortgage will be modified so that they stay at 5%. At this point the model can include shared equity appreciation to recoup the subsidy to the mortgage or preferably, the lender takes a haircut on principle, rate or term depending upon the situation of the borrower and modifies the loan to 5% fixed 30 year term.
There are two ways to do this. The first is a purchase of the mortgages by the review board which will also be the governing board of the MBS Finance Authority. This entity could be an ad hoc agency created by industry, Congress, Treasury and consumer groups. The Board could be gaveled together quickly-one week, and in its stead, the Treasury Secretary could begin to act, knowing that every transaction will be scrutinized and vetted by the Review Board. Because this authority owns the loans and/or the mortgage-backed securities, it will have the power to modify the loans that collateralize the securities and maintain solvency to the pools of mortgages. Return will be reduced, but default and loss will be minimized to only those individual mortgages with out a real income stream that can persist. Estimates are that this part of the market may be as high as 15% of the mortgages in question, but even at that draconian number; the broader markets are exceptionally salvageable. All, with homeowners coming first.
The second way is simply for all of the current mortgage holders, whomever they may be to agree to a rewrite of the master servicing agreements to allow the same type of modification. This would mean that the assets would not have to exchange hands, but would still force mark-to-market, real time liquidity and accurate financial statements as we try to rebuild the infrastructure of our financial services industry and keep homeowners in their homes paying their new mortgages, buying goods and services and maybe for the first time in a while saving a minimum of 5% of income. This recipe will not only stabilize markets, but in a few months begin to incent real savings and a reasonable cost of funds to support consumer lending in the country.
This would leave alone mortgage contracts that do not have to be modified and would give only a temporary authority to abridge these contracts. Investors would be assured that when the contagion had been isolated, treated and returned to society, there would be no chance of it spreading weakness to other assets. They also would not have to fear that future mortgage contracts would be similarly modified, if we set up adequate regulations and underwriting guidelines similar to what qualified housing counselors are utilizing and have been utilizing in most CRA loan situations since the early nineties.
How we determine what is eligible for purchase will determine the fairness and the viability of the restructuring. Fraud, investor abuse and borrower deceit will not qualify for either method chosen. These situations should take their losses and be reckoned with legally. However, in these situations where it is ascertained that the borrower / homeowner was not to blame, but was a victim of transaction-oriented fee-paid professionals, the loan should be modified and the perpetrators prosecuted.
There are many different ways to get to fairness and capacity. That is the key. We need both a fair system of rescue and the capacity to keep our economy running without the elimination of the democratizing of credit or the end of the American Dream. Preservation of the system behooves preservation of the underlying economic engines that are the American households and families who go to work every day, pay their mortgages and support our businesses, large and small. If we preserve these homes and their residents, we are preserving the economic engines. The banks, investors and servicers will have income streams that will feed their net operating income. They will have capacity to lend more as they recapitalize on healthier performing and valued portfolios. This scenario could lead to preservation of 75-85% of home value and 90% of lending capacity and tier one capital for banks over the next two-three years. We must stop the foreclosures because it is the right and correct thing to do.
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