CMPS Institute comments on FDIC and Treasury’s troubled mortgage guarantee programtype author here..CMPS Institute, Troubled Asset Guarantee program, Emergency Economic Stabilization Act of 2008, EESA, Collateralized Mortgage Obligations, foreclosures
Public comments were due this week on the U.S. Treasury's
Troubled Asset Guarantee program, a part of the $700 billion
financial rescue package that has yet to be created and
implemented. The financial rescue package, formally known as the
Emergency Economic Stabilization Act of 2008 (EESA), allows the
federal government to insure mortgages, mortgage-related
securities, and other financial assets in addition to purchasing
these assets outright.
"The general idea is that by insuring the troubled assets, the
government would spend less money overall than simply purchasing
the assets outright," said Gibran Nicholas, chairman of the CMPS
Institute, an organization that certifies mortgage bankers and
brokers. Expenditure of public funds would only occur if the
mortgages or other loans actually default and the lender is not
able to recover the insured value of their asset.
In prepared comments sent to Treasury on behalf of the CMPS
Institute, Nicholas wrote, "Troubled mortgage assets such as
Residential Mortgage Backed Securities (RMBS), Collateralized
Mortgage Obligations (CMOs), Collateralized Debt Obligations (CDOs)
and other mortgage loan derivatives, cannot be effectively insured
without first examining the value and likely performance of the
underlying mortgage loans. Further, it is unwise for the government
to assume liability for insuring whole loans unless there is a
reasonable expectation that the loans will perform well." The CMPS
comments were focused on the three root causes of the financial
crisis:
• Uncertainty Regarding the Value and Performance of
Underlying Mortgage Loans
• Decline in Housing Values and Negative Homeowner
Equity
• De-leveraging Among Financial Institutions and
Mark-to-Market Accounting
The comprehensive CMPS proposal calls for a 90-180 day
nationwide moratorium on foreclosures, during which time a
large-scale systematic restructuring of mortgage loans will occur.
Lenders will have the option of re-writing the loans entirely as
part of their participation in the FHA Hope for Homeowners program,
or they could participate in a government-mandated program of
mass-modifications that would include these elements:
• A reduction in all home mortgage balances to not more
than 90 percent of the homeowner's current home value as
established by one or more independent appraisers.
• A Home Mortgage Guaranty (HMG) fee paid by the lender to
the federal government equal to 3% of the new loan amount.
• Government insures against any further decline in
mortgage value (below the 90 percent of current home value) over a
three-year time frame
• Homeowners who receive a benefit from reduced mortgage
balances would be required to share 50% of all current and future
equity with the government.
• Representations and warrantees from the lender and the
lender's agents that they have helped the borrower establish a
household budget demonstrating long-term affordability of the new
monthly mortgage payments. Borrowers who still cannot afford
modified loan terms will be sent through the foreclosure process in
order to avoid pushing the problem into the future.
• In the case of situations involving second or third
liens, the second or third lien positions would be entirely wiped
out with no potential for equity sharing. This incentivizes lenders
to participate in the FHA Home for Homeowners program that does
allow for equity sharing on the part of second lien holders.
Further, 2nd and 3rd liens typically carry higher interest rates
than 1st liens in order to compensate for the risks inherent in
their subordinate lien positions.
• The HMG program would be mandated on all new primary
residence home purchases for a certain period of time. This would
effectively insure home buyers against any losses below 90% of home
value over a three-year timeframe, while giving the federal
government an enormous revenue stream without raising taxes (three
percent of 90 percent of the aggregate value of all U.S. primary
home purchases). This would stimulate the real estate markets,
stabilize real estate values, shore up consumer confidence and
spending, and cushion the downturn in the economy.
"Although this proposal would require financial institutions to
book massive losses in reducing mortgage balances, they could
quickly recapitalize and restore adequate capital ratios through
direct injection of funds by the Treasury Department as is already
being implemented," said Nicholas. "Consumers, financial
institutions, taxpayers, the U.S. government and the entire U.S.
and global economy will benefit from the enormous economic stimulus
and boost to consumer confidence and spending that will occur as a
result of reductions to overall home owner debt and debt service
levels. The HMG fees on all restructured mortgages and new home
purchases will result in enormous and immediate revenue streams to
the federal government and taxpayers. Further, through equity
sharing, the government will recover up to half of all U.S.
mortgage balance reductions under the HMG program."
The CMPS proposal can be downloaded in its entirety by clicking
here.
For more information, visit www.cmpsinstitute.org.
