Foreclosure Prevention Bill Shields Servicers From Fraud

Inquiring minds are investigating provisions of a foreclosure prevention plan working its way through Congress. The plan throws away more taxpayer money while shielding servicers from misconduct. In other words, the bill does exactly what one might expect from this Congress and this administration.

Please consider the Washington Post article Foreclosure Prevention Plan Expanded to 2nd Mortgages.

The Obama administration unveiled an expansion of its $75 billion foreclosure prevention plan yesterday, providing new subsidies to mortgage lenders and investors. Under the expanded plan, some homeowners could see their payments fall significantly and the interest rate on their second mortgage pushed down to 1 percent.

The administration's housing plan pays lenders to help borrowers stay in their homes by modifying their mortgages to an affordable level. But, the plan as first announced in February applied only to primary mortgages. Now, lenders will be eligible for payments when they modify the terms of a second mortgage, including a home-equity line.

Under the new plan, lenders would receive $500 for modifying the second mortgage, plus $250 a year for three years if the loan remains current. The borrower would be eligible for $250 a year for five years to lower their principal balance. The borrower could have the interest rate lowered to 1 percent, depending on the type of loan, with the government sharing the cost of the rate reduction.

Senior administration officials said they expect the second-mortgage program to help 1 million to 1.5 million of the up to 4 million households expected to be covered by the wider loan-modification program. The program, which will take several weeks to get running, will be paid for through bailout funds already allocated to the program, officials said.

The Treasury Department also is attempting to breathe new life into another government foreclosure prevention program, called Hope for Homeowners. That program, launched last year, refinances homeowners into more affordable mortgages. But lenders have balked at requirements that they cut some of the principal that borrowers owe. Only one homeowner has received a government-backed loan under the program so far.

My Comment: Hope for Homeowners is the best housing bill in history. It did absolutely nothing. If only all legislation could be so good.

Now, lenders will receive $2,500 to refinance a borrower into Hope for Homeowners and $1,000 a year for up to three years as long as the borrower stays current.

My Comment: This just goes to show you: On the extremely rare occasions when Congress produces perfectly fine legislation, they always end up tinkering with it, undoubtedly making it worse.

Meanwhile, a coalition of mortgage investors is fighting a provision in a housing bill that would shield lenders from lawsuits. Lenders have said they are unable to change some mortgages because they fear being sued for breaking their contracts with investors who own pools of mortgages.

The safe harbor provision was included in the House version of the housing bill without much controversy. But in recent weeks, investors have begun organizing against it, including a coalition that hired lobbying firm Patton Boggs.

"The safe harbor provision protects mortgage servicers from lawsuits alleging misconduct in the past and future," said Micah Green, a Patton Boggs lobbyist.

Green declined to name the coalition's members, saying the group is still being formed, but that so far it represents about 10 firms that manage more than $100 billion in mortgage investments.

The Senate is expected to vote on the provision as part of a larger housing bill tomorrow.

The bill hugely rewards servicers for every loan they modify. This creates an incentive for servicers such as Countrywide (Bank of America) to modify loans whether or not that is in best interest of the mortgage holders. Worse yet, the Safe Harbor Provision goes one step further and shields servicers if they do commit such fraud.

I am not a lawyer, but I believe both the servicer incentives and the safe harbor provision are unconstitutional. President Obama, like president Bush before him, appears to have no concern for the constitution.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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