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.