FOR IMMEDIATE RELEASE: February 12, 2008
Schumer on 'Project Lifeline': Pausing Foreclosures is not Enough: Marking Loan Principals Down to Market Value 'Most Viable' Resuce Option for Many Borrowers
Senator: Pausing Foreclosures Is Helpful, But must Be Followed By Loan Reductions for Borrowers Whose Debt Exceeds Their Homes' Worth 'Project Lifeline' Participants Could Spare Servicers From Investor Lawsuits By Making Chargeoffs An Industry Standard
WASHINGTON, D.C. – U.S. Senator Charles E. Schumer (D-NY) today urged the banks participating in the “Project Lifeline” program with the Bush administration to go a step further than the plan announced today, and embrace a standard workout for borrowers, complete with a marking down of the loan principal to the market value of the home. The loan reduction, or “principal chargeoff,” would provide a viable rescue option for borrowers trapped in so-called “underwater” loans, or loans whose balance is greater than the home is worth.
"It is encouraging that lenders and servicers are willing to temporarily pause foreclosures, but only meaningful and long-term loan modifications will help keep people in their homes. For many borrowers who owe more than their homes are worth, marking the loan principal down to market is the most viable rescue plan. But many servicers feel they are only allowed to modify loans in a way that conforms to standard industry practices. Because Project Lifeline includes a critical mass of the leading stakeholders in the mortgage industry, this alliance, along with Fannie and Freddie, has the ability to declare loan writedowns a standardized practice with the snap of its fingers. Project Lifeline is doing the right thing by putting foreclosures on pause, but it should take the next stop and perform workouts that cut down the borrower’s debt," Schumer said. "Congress is working to give bankruptcy judges the ability to trim borrowers debt but that same option should be available to homeowners before they have to declare. Americans shouldn't have to go to court to get a loan writedown."
Industry analysts estimate that more than 30 percent of homeowners who bought in the last two years owe more on their mortgage than their house is currently worth. Many of these "underwater" loans are resolved through a short sale in which the struggling borrower lines up a buyer willing to pay the current market price in exchange for the investor accepting a reduction in the borrower's debt so the sale proceeds are sufficient to repay the entire debt. This structure allows the borrower to escape their unaffordable debts, while allowing the servicer and investor to avoid the burdensome and expensive foreclosure process. However, Schumer said this outcome is far from ideal as the borrower is forced to leave their home, and the sale of the home at a reduced price contributes to the downward pressure on housing prices at a local level.
Last week, Schumer sent Fannie Mae and Freddie Mac a letter urging them to utilize a different type of modification called a "partial chargeoff" of the loan principal. Under this structure, a servicer could modify the homeowner’s loan by reducing the balance owed in cases where the size of the mortgage debt is greater than the value of the home. This would allow the borrower to make lower monthly payments or refinance into a more affordable product, preserving their home. This process would avoid the pain and expense of initiating a foreclosure or short sale and still provide a positive outcome for all of the interested parties.
Schumer said he had heard from servicers that, under the terms of their legal agreements with investors, they are only allowed to engage in modifications that are standard industry practices. Because partial chargeoffs are not currently standard industry practice for loan modifications, these servicers are concerned about opening themselves up to increased liability from investor lawsuits. If the GSEs endorse partial chargeoffs, the practice will become available for all servicers, potentially saving hundreds of thousands of homeowners from foreclosure. Schumer said today the "Project Lifeline" participants could accomplish the same goal if they embraced chargeoffs as a preferred method of loan modification, along with the rate-freeze approach embraced in the Bush administration’s previous rescue plan.