In December 2007, five Massachusetts banks joined together to help New England homeowners floundering in the mortgage crisis. The banks’ initiative, called the Mortgage Relief Fund, aimed to help homeowners paying high rates—and those who face a reset of an adjustable-rate loan—to refinance into a more affordable mortgage, avoid delinquency, and avoid foreclosure.
It was a timely and comprehensive initiative backed by a commitment of $125 million from the founding banks—Citizens Bank, Sovereign Bank, TD Banknorth, Webster Bank, and Bank of America—for mortgage loans. Supported by the Federal Reserve Bank of Boston, the banks stepped in to fill what they saw as a gap in the market.
“I really commend these banks for stepping forward and working so hard to develop this initiative – which we all hope will assist a key subset of borrowers,” said Eric Rosengren, President and CEO of the Boston Fed.
As the months passed, the program only became more relevant. More customers clamored for options to avoid foreclosure, and banks responded.
In June 2008, the Federal Reserve Bank of Boston and the Massachusetts Bankers Association (MBA) that the Mortgage Relief initiative introduced in December has grown from the initial five banks to more than 50 banks of every size, with branches throughout Massachusetts and much of New England.
The initiative has expanded both because of the enthusiastic response from banks and the increased need in the market place. The original plan was to reach out to a subset of borrowers – those whose home is worth more than the balance of their mortgage, who have generally made mortgage payments on time, who reside in the property, and who can document their income. Banks could help those customers find a more predictable and affordable mortgage.
But as the crisis deepened, the initiative evolved. Parameters broadened. Falling home prices in many parts of New England have eroded home equity. As a result, some borrowers’ homes are now worth less than their loans, and refinancing into a new mortgage can be difficult.
President and CEO of the MBA Daniel Forte said, “There is no single, easy answer. Banks did not cause this problem but the Mortgage Relief banks, regardless of their size, want to be part of the solution. They have a stake in the success of the local and regional economy.”
Research by the Federal Reserve Bank suggests that as many as a quarter of the borrowers holding sub-prime loans actually have solid credit histories and some home equity, and both banks and the Federal Reserve hoped to reach those borrowers, as well as those hit particularly hard by declining property values.
Whenever possible, the banks participating in the initiative will help eligible homeowners refinance into conventional loans that will better meet their needs. “Unlike many sub-prime lenders,” Forte added, “banks are a safe and sound place to discuss your credit needs and financial situation, with expertise and respect.”
The banks joining the Mortgage Relief initiative have made a number of commitments:
--to reach out to borrowers in difficult mortgages, in part by contributing to a pool for mortgage relief advertising;
--to expand their use of programs that may help borrowers with limited home equity (programs like Federal Housing Authority loan guarantees and those of state agencies);
--to designate one or more “go to” staff members who can help borrowers explore their mortgage relief options;
--to adopt a goal for responsible lending under the program (ranging from $500,000 for small banks with under $250 million in assets to $2.5 million for community banks with over $1 billion in assets);
--to share with fellow participants the products and approaches that prove effective in helping challenged borrowers, and to refer individuals they cannot help to other participating banks or housing-counseling agencies.
“The biggest challenge we have encountered is that declining home prices have left many of the target borrowers ‘under water’ in terms of home equity, and those loans are just incredibly difficult for lenders to arrange,” said Lynn Browne, executive vice president at the Federal Reserve Bank of Boston and a member of the program’s steering group.
When they can’t assist with a loan, the Mortgage Relief banks urge borrowers in difficult situations to contact the servicer of their mortgage as soon as possible (in particular, the servicer’s loss mitigation department), or a mortgage-counseling service such as the Homeownership Preservation Foundation or regional foreclosure-prevention centers.
But that’s only one aspect of the web of connections the banks are developing and accessing.
In an attempt to stimulate and promote stability in the market, a new housing bill was passed in Congress and signed by President Bush in late July.
This massive housing bill intended to provide mortgage relief for 400,000 struggling homeowners and stabilize financial markets.
"We look forward to put in place new authorities to improve confidence and stability in markets," White House Spokesman Tony Fratto said. He said that the Federal Housing Administration would begin right away to implement new policies "intended to keep more deserving American families in their homes."
The bill gives homeowners, who can not afford their current payments, the opportunity to refinance with affordable government-backed loans rather than lose their homes. It also takes measures to stabilize the ailing housing market. One of which is that it will be set-up to assist an estimated 400,000 debt-strapped homeowners, many of whom owe more their houses are worth, from foreclosure by allowing them to get more affordable mortgages backed by the Federal Housing Administration (FHA). The FHA plans to insure $300 billion in these mortgages. But before the homeowners can truly benefit, banks must first agree to take a large loss on the existing loans in exchange for avoiding a foreclosure—which often translates into a greater loss. It also provides $180 million in pre-foreclosure counseling for struggling homeowners.
Legislators say that the measure is also designed to relieve a broader credit crunch resulting from rising defaults and falling home values. To free up safer and more affordable mortgage credit, the bill will increase the size of the home loans that Fannie Mae and Freddie Mac can buy and the FHA can insure (to $625,000). They also could buy and back mortgages 15 percent higher than the median home price in certain areas.
$15 billion in tax cuts will be in the works, and includes a significant expansion of the low-income housing tax credit and a credit of up to $7,500 for first-time home buyers--for houses purchased between April 9, 2008, and July 1, 2009.
