Congress Passes Housing Bill that Fails to Solve the Real Problem

The U.S. Senate passed HR 3221 on Saturday and the President indicated that he would sign the bill into law Monday. While the bill does expand the availability of government insured home loans to a number of borrowers, the bill fails to address the eight hundred pound gorilla which is the mortgage companies who refuse to work with borrowers facing financial difficulties. The bill does nothing to force those mortgage companies to work with borrowers. All it does is it allows mortgages to be refinanced into government loans if the current lender consents and it appears to give loan servicers more flexibility in working out solutions. What is really missing is the ability of consumers to force lenders to modify the loans and the ability to do so in a bankruptcy. Right now real estate investors, corporations, and everyone else have this privilege but homeowners may not modify the loans on their principal residence. Regardless, regulators have indicated that it may take a year to promulgate regulations implementing this law.

Sections of the bill of interest are:

SEC. 402. SAFE HARBOR FOR QUALIFIED LOAN MODIFICATIONS OR WORKOUT PLANS FOR CERTAIN RESIDENTIAL MORTGAGE LOANS.

(a) Standard for Loan Modifications or Workout Plans- Absent contractual provisions to the contrary–

• (1) the duty to maximize, or to not adversely affect, the recovery of total proceeds from pooled residential mortgage loans is owed by a servicer of such pooled loans to the securitization vehicle for the benefit of all investors and holders of beneficial interests in the pooled loans, in the aggregate, and not to any individual party or group of parties; and

• (2) a servicer of pooled residential mortgage loans shall be deemed to be acting on behalf of the securitization vehicle in the best interest of all investors and holders of beneficial interests in the pooled loans, in the aggregate, if for a loan that is in payment default under the loan agreement or for which payment default is imminent or reasonably foreseeable, the loan servicer makes or causes to be made reasonable and documented efforts to implement a modification or workout plan or, if such efforts are unsuccessful or such plan would be infeasible, engages or causes to engage in other loss mitigation, including accepting a short payment or partial discharge of principal, or agreeing to a short sale of the property, to the extent that the servicer reasonably believes the modification or workout plan or other mitigation actions will maximize the net present value to be realized on the loan over that which would be realized through foreclosure.

(b) Safe Harbor- Absent contractual provisions to the contrary, a servicer of a residential mortgage loan that acts or causes to act in a manner consistent with the duty set forth in subsection (a), shall not be liable for entering into a qualified loan modification or workout plan, to–

• (1) any person, based on that person’s ownership of a residential mortgage loan or any interest in a pool of residential mortgage loans or in securities that distribute payments out of the principal, interest and other payments in loans on the pool;

• (2) any person who is obligated to make payments pursuant to a derivatives instrument determined in reference to any interest referred to in paragraph (1); or

• (3) any person that insures any loan or any interest referred to in paragraph (1) under any law or regulation of the United States or any law or regulation of any State or political subdivision of any State.

(c) Rule of Construction- No provision of this section shall be construed as limiting the ability of a servicer to enter into loan modifications or workout plans other than qualified loan modification or workout plans.

(d) Definitions- For purposes of this section, the following definitions shall apply:

• (1) QUALIFIED LOAN MODIFICATION OR WORKOUT PLAN- The term `qualified loan modification or workout plan’ means a modification or plan that–

• • (A) is scheduled to remain in place until the borrower sells or refinances the property, or for at least 5 years from the date of adoption of the plan, whichever is sooner;

• • (B) does not provide for a repayment schedule that results in an increase in the outstanding principal balance of the loan, including by deferred or unpaid interest, fees, or other charges; and

• • (C) does not require the borrower to pay additional points and fees.

• (2) RESIDENTIAL MORTGAGE LOAN DEFINED- The term `residential mortgage loan’ means a loan that is secured by a lien on an owner-occupied residential dwelling.

• (3) SECURITIZATION VEHICLE- The term `securitization vehicle’ means a trust, corporation, partnership, limited liability entity, special purpose entity, or other structure that–

• • (A) is the issuer, or is created by the issuer, of mortgage pass-through certificates, participation certificates, mortgage-backed securities, or other similar securities backed by a pool of assets that includes residential mortgage loans; and

• • (B) holds such loans.

(e) Effective Period- This section shall apply only with respect to qualified loan modification or workout plans initiated prior to January 1, 2011.

Here is how the Senators voted: