Last week, Rhode Island Federal District Court-appointed Special Master Merrill Sherman filed a report on Rhode Island's foreclosure crisis in which she argued for debt forgiveness, or "principal reduction," as a strategy to help families keep their homes. Today, U.S. Senator Sheldon Whitehouse (D-RI) forwarded Sherman's report to the federal regulator for Fannie Mae and Freddie Mac, Edward DeMarco of the Federal Housing Finance Agency (FHFA), along with a letter endorsing the report's suggestions and calling on the agencies to grant mortgage modifications with principal reductions.
While homeowners with mortgages not backed by Fannie Mae or Freddie Mac have been able to get economically-viable modifications, the FHFA's refusal to permit principal reductions has limited the value of the federal government's Home Affordable Modification Program (HAMP) for thousands of Rhode Island families struggling to keep their homes.
"The cases Ms. Sherman describes mirror the ones that constituents have brought to my attention, and I fully endorse her call for principal reductions," Whitehouse wrote. "I hope that after reading Ms. Sherman's report you will reconsider your opposition to principal reductions and recognize that supporting mortgage modifications makes economic sense for the homeowners and economic sense for our struggling housing recovery."
Throughout his time in the Senate, Whitehouse has consistently supported principal reduction strategies as a way to prevent foreclosures. He has held hearings on, and introduced legislation to support efforts in Rhode Island to bring together homeowners and lenders in "mortgage mediation" sessions that can lead to loan modifications. He has also cosponsored legislation that would have allowed bankruptcy court judges to modify mortgages for homeowners going through the bankruptcy process.
Rhode Island's foreclosure rate is currently the highest in New England and among the highest in the country. In addition to advocating for principal reduction, Senator Whitehouse has also worked with the state's Congressional delegation to secure nearly $80 million in Federal Hardest Hit Fund money, which so far has helped over 1,600 homeowners avoid foreclosure.
The full text of the letter is below.
October 12, 2012
Federal Housing Finance Agency (FHFA)
400 7th Street, SW
Washington, DC 20024
Dear Mr. DeMarco:
As homeowners in my state continue to suffer in the aftermath of the housing bubble and subsequent crash, I write to share the attached report by Merrill Sherman, the U.S. District Court-appointed Special Master overseeing all federal-court foreclosure cases in Rhode Island. As the former CEO of Bank RI and one of our most respected business leaders, Ms. Sherman is uniquely qualified to evaluate the foreclosure crisis in our state. In her October 4 report, she updates the court on her efforts to facilitate settlements in 581 cases within her purview.
Ms. Sherman reports that in the vast majority of these cases the first mortgage is significantly underwater, and the homeowners face settlement offers that may not be in their economic interest. She derides modification offers from servicers of Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac)-backed mortgages for lacking principal reductions and concludes, "a defaulting borrower staying in a house which is significantly underwater is economic folly and can have serious adverse, longer-term personal consequences."
Given the lack of flexibility from servicers of Fannie Mae and Freddie Mac mortgages, Ms. Sherman has declined to schedule settlement conferences for them because she "did not believe the result would be productive." While acknowledging that so-called "strategic default" is a legitimate concern when principal may be reduced, she says:
The solution is NOT to refuse forgiveness. The solution is to modify, conditionally forgive to a reasonable level and take a "soft second" that provides that the bulk (say 75%) of the equity appreciation from the date of the modification goes to the mortgage holder. Additionally, the entire debt can be reinstated if the modified loan goes into default. Those elements should be sufficient to prevent widespread strategic default.
The cases Ms. Sherman describes mirror the ones that constituents have brought to my attention, and I fully endorse her call for principal reductions. It is simply unconscionable to maintain an inflated principal balance when the market value is the most the mortgage holders would receive in foreclosure. Additionally, I believe Ms. Sherman's proposed conditions would sufficiently guard against bad actors gaming the system.
As you know, the Treasury Department, which overseas Home Affordable Mortgage Program (HAMP) modifications for non-GSE-backed mortgages, has implemented a principal reduction program. In a July 31, 2012 letter to you, Secretary Geithner noted that permitting the GSEs to participate in principal reductions could help up to half a million homeowners, saving them $3.6 billion and saving the taxpayers $1 billion through reduced defaults. Moreover, banks are engaging in principal reductions in their own portfolios, without prompting waves of strategic default.
I echo Ms. Sherman and Secretary Geithner's calls for the FHFA to support Fannie Mae and Freddie Mac mortgage modifications with principal reductions. As Secretary Geithner said in his letter to you, "you have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis." I hope that after reading Ms. Sherman's report you will reconsider your opposition to principal reductions and recognize that supporting mortgage modifications makes economic sense for the homeowners and economic sense for our struggling housing recovery.
United States Senator
Cc: Hon. Timothy Geithner, Secretary, United States Department of the Treasury