July 10, 2009


Honest Accounting Key to Effort to Help Families Keep Their Homes & Stabilize the Housing Market

WASHINGTON – Today Senate Banking Committee Chairman Chris Dodd (D-CT) and House Financial Services Chairman Barney Frank (D-MA) sent a letter to the heads of the bank regulatory agencies asking them to address whether banks are inflating the value of 2nd mortgages on their balance sheets, thereby discouraging proactive efforts to modify and restructure mortgage loans and crippling programs designed to prevent foreclosures.
Across the country housing prices have dropped and many Americans owe far more on their mortgages than their homes are worth.  Because they are “underwater,” these homeowners are unable to refinance, leaving them unable to make payments.  The HOPE for Homeowners program was designed to help Americans stay in their homes by adjusting their mortgages to 90% of the assessed value of their property while helping mortgage companies prevent larger losses they would face if the homes simply went into foreclosure.
The tough reality is that in areas where housing prices have dropped dramatically, 2nd   mortgages may be virtually worthless.  Regrettably, many banks are still unwilling to update their balance sheets to show these assets have dropped in value, and inflated values have made it virtually impossible for HOPE for Homeowners to work.  These companies would rather deny reality today, even if it means more people losing their homes and the banks losing more money down the road with a further explosion of foreclosures.
Below/attached, is the letter:
July 10, 2009
The Honorable Ben Bernanke                                                            The Honorable Sheila C. Bair
Chairman                                                                                             Chairman
Board of Governors of the                                                                 Federal Deposit Insurance
Federal Reserve System                                                                      Corporation
20th and Constitution Avenue, NW                                                    550 17th Street, NW
Washington, DC 20551                                                                      Washington, DC 20429
The Honorable John Dugan                                                                Mr. John E. Bowman
Comptroller of the Currency                                                               Acting Director
Office of the Comptroller of the Currency                                         Office of Thrift Supervision
Administrator of National Banks                                                       1700 G Street, NW
Washington, DC 20219                                                                      Washington, DC 20552
The Honorable Michael E. Fryzel
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428
Dear Sirs/Madam:
            One of our highest priorities as Chairmen, respectively, of the Senate Committee on Banking, Housing, and Urban Affairs and the House of Representatives Financial Services Committee has been to help people save their homes from foreclosure.  To do so, we have sought to create adequate tools to address the foreclosure crisis created by the bubble in housing prices, aggressive marketing of risky mortgages, weak underwriting standards, and inadequate regulation.
            A key part of this effort was the creation of the HOPE for Homeowners (H4H) program, enacted as part of the Housing and Economic Recovery Act of 2008 (HERA), and the improvements made to the program in the Helping Families Save Their Homes Act of 2009.  The program is premised on the view, expressed by Federal Reserve Board Chairman Bernanke and others, that the creation of equity for troubled homeowners is likely to be an effective tool for helping families keep their homes and avoid foreclosure.
            In recent discussions with servicers, investors in mortgage backed securities, and Administration officials, it has become clear that one of the most significant impediments to the success of H4H is the unwillingness of subordinate lien holders to extinguish their liens as required for participation in this program, even in return for offers of reasonable compensation.  This is true despite the fact that these subordinate liens may have minimal economic value. 
We understand that the nation’s largest mortgage servicers carry on their balance sheets significant volumes of these subordinate liens in the form of closed-end second mortgages or home equity lines of credit.  We are concerned that the loss allowances associated with these subordinated liens may be insufficient to realistically and accurately reflect their value, especially in light of the historically poor performance of first lien mortgages and seriously diminished values of the underlying collateral. As you know, the nation has experienced sharp declines in home prices, with further declines expected in many markets.  This has resulted in as many as 20 percent of all homeowners having mortgages that exceed the value of the home.  These numbers are likely to be much higher in the case of option ARMs and subprime loans. 
Many subordinate liens stand behind these mortgages.  Carrying these loans at potentially inflated values may contribute to resistance on the part of servicers to negotiate the disposition of these liens, and thus may stand in the way of increasing participation in the H4H program.  Inadequate reserving would also overstate the capital position of these institutions at a time when an accurate picture of the capital adequacy of the banking system is crucial. 
We urge you and your staff to look into this issue as expeditiously as possible to ensure that we can achieve the vital goal of the H4H to help American families build equity and keep their homes.  Please be in contact with us or our staff to review your findings in this area as soon as possible. 
Thank you for your prompt attention to this matter.