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Page 3 of 3 | Appendix A – Homeowner savings | | US Estimates | | Year | | 1Q-2Q | | Row | Measurement | 2004 | 2005 | 2006 | 2007 | | a | Projected Foreclosures | 16% | 19% | 19% | 19% | | b | Probability of ARM | 87% | 93% | 92% | 80% | | c | Probability of FRM | 13% | 7% | 8% | 20% | | d | Probability of Foreclosure Given ARM | 16% | 20% | 20% | 20% | | e | Probability of ARM Given Foreclosure | 91% | 95% | 94% | 85% | | f | Probability of Shock | 98% | 97% | 97% | 97% | | g | Probability of Outstanding | 21% | 57% | 72% | 99% | | h | Proportion that could be helped (% Original Cohort) | 3% | 10% | 13% | 15% | | i | Original cohort | 2,219,547 | 3,259,908 | 3,219,749 | 1,093,105 | | j | Estimate of eligible homeowners | 64,960 | 335,260 | 413,237 | 169,041 | | k | Total eligible | 982,498 | | | | | l | % of outstanding borrowers | 14% | 18% | 18% | 16% | | m | Total % of outstanding borrowers | 17% | | | | | n | Less expected modifications (10%) | 6,496 | 33,526 | 41,324 | 16,904 | | o | Less economically unviable (25%) | 16,240 | 83,815 | 103,309 | 42,260 | | p | Net potential help | 42,224 | 217,919 | 268,604 | 109,877 | | q | Net total potential help | 638,624 | | | | | r | Net potential help as % outstanding borrowers | 9% | 12% | 12% | 10% | | Net total potential help as % of outstanding | | | | | s | borrowers | 11% | | | | | | Chart Data | All | All Count | FC only | FC Count | | | Loans not projected to foreclose | 81.5% | 7,979,097 | | | | | Projected foreclosures completed or fixed rate | 8.5% | 830,714 | 45.8% | 830,714 | | | Projected foreclosures that cannot be helped | 3.5% | 343,874 | 19.0% | 343,874 | | | Population that could be helped | 6.5% | 638,624 | 35.2% | 638,624 |
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| a | Projected Foreclosures | CRL, Losing Ground report, 2007 assumed | | | b | Probability of ARM | Fannie Mae, Bloomberg | | | c | Probability of FRM | Fannie Mae, Bloomberg | | | d | Probability of Foreclosure Given ARM | UNC research, calculation | | | e | Probability of ARM Given Foreclosure | Calculation | | | f | Probability of Shock | HMDA, Federal Reserve H.15 | | | g | Probability of Outstanding | Bloomberg | | | | Proportion that could be helped (% | | | | h | Original Cohort) | Product of rows a, e, f, g | | | | | CRL, Losing Ground, Net Drain reports, Inside | | | i | Original cohort | B&C Lending | | | j | Estimate of eligible homeowners | Calculation | | | k | Total eligible | Calculation | | | l | % of outstanding borrowers | Calculation | | | m | Total % of outstanding borrowers | Calculation | | | | | 10% estimate from Moody's 7/12/07 | | | n | Less expected modifications (10%) | conference call | | | o | Less economically unviable (25%) | 25% assumption | |
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| We estimate that the proposed changes potentially could help 638,000 homeowners stave off foreclosure arising solely from a subprime adjustable-rate mortgage with a large payment shock. This estimate is net of borrowers who are expected to receive loan modifications (10%) and those who are expected to fail in any event (25%). This document details the logic, assumptions, and calculations made to arrive at this estimate. |
| We begin with our estimate of total projected foreclosures for each subprime loan vintage (i.e., annual cohort) in row a. The projections from 2004-2006 are based on our “Losing Ground” report, issued in December 2006. The 2007 figures reflect an assumption that the projected foreclosure rate for this vintage will follow that for 2006. This assumption is based on (1) observations of securitized loan deals brought to market in 2007 showing that loan origination quality has not improved markedly and (2) continued concerns about the strength of the housing market. |
| Next, in row e, we calculate the proportion of all projected foreclosures that are expected to be adjustable-rate mortgages (ARMs) based on (1) ARM market share (row b) and (2) elevated risk that ARMs will experience foreclosure, based on published research from the University of North Carolina. |
| Next, in row f, we analyze Home Mortgage Disclosure Act (HMDA) data to arrive at an expectation for the proportion of ARM loans that will experience significant payment shocks at reset. Here, the test for significant payment shocks are that the new payment will be greater than 50% of the original reported borrower income and will be 10% above the original payment burden. Since HMDA data does not contain key information, to arrive at an “average” expectation, we assume all loans are ARMs with 30 year terms, |
| carry a typical start rate, and a typical margin. Using HMDA-reported borrower incomes and loan amounts, we then reach the reported figures. For 2007, we assume the figure will follow 2006. |
| Next, in row g, we observe the proportion of securitized loans from each year that are still outstanding through market data on subprime mortgage backed securities on Bloomberg. |
| We then multiply rows a, e, f, g (foreclose % * % ARM given foreclosure * % outstanding * % with expected payment shock) to arrive at our estimate of borrowers who are “eligible” for help: that is, current borrowers with a subprime ARM projected to end in foreclosure and carrying a large built-in payment shock. |
| From here, we discount the estimate to take into account expectations for borrowers who will receive loan modifications from lenders (row n) and borrowers who are likely to fail in any event (row o). |
| Appendix B – Evaluation of HR 3609 |
| Rep. Miller has introduced the Emergency Home Ownership and Mortgage Equity Protection Act of 2007, which is co-sponsored by two members of this Subcommittee, Chairman Sánchez and Rep. Watt, as well as Reps. Frank and Maloney. CRL is strongly supportive of HR 3609; it directly addresses the lack of ability for judges to modify mortgages on a principal residence and will provide substantial help to struggling homeowners, neighbors, and the economy as a whole. |
| In addition to the chapter 13 modification provision that is the subject of this testimony, CRL strongly supports these provisions from Rep. Miller’s bill: |
| 1 Amortization after the plan. Without enabling the mortgage to be amortized beyond the end of the plan, the proposal would not be effective. We propose that the period of amortization be 30 years, less the number of years that the borrower has been in the house. 2 Protection against abusive fees. This provision would require lenders to give notice of fees levied, provide debtors a chance to object, and, if required, give the court the ability to determine the fee’s reasonableness. Abusive fees are so significant a problem that they have seriously undermined chapter 13 mortgage relief, even for debtors who complete their plans. Lenders often add unauthorized or excessive fees to accounts, without telling the debtor or the court. Examples include attorney's fees, even for litigation the lender lost, often far in excess of reasonable amounts for standard form motions; fees for numerous "property inspections"; late fees that are improper because chapter 13 payments are misapplied by lender software, and other junk fees. Many debtors find out about the fees only after the bankruptcy case is over. In many cases they thought they had resolved their mortgage problem, only to find themselves two or three months behind again because payments were applied to the fees. Otherwise, they often do not find out until they go to refinance or sell, and the fees are demanded at closing, when debtors are under tremendous pressure to pay them so the closing goes through. 3 Waiver of credit counseling. Credit counseling is a useful tool for a family having financial difficulties, but a debt management plan will not help a family facing imminent foreclosure; it is far too late for that. It can only waste money and time, both of which are in scarce supply in such a situation. The GAO questioned the utility of credit counseling in any event. |
| CRL also supports the addition of three other provisions. |
| 1. Homestead exemption for people over 55 for purposes of bankruptcy. Many older Americans have more equity in their home than a state’s low homestead exemption permits, but have a mortgage loan with an unaffordable or exploding interest rate. This provision would enable a judge to recast the interest rate in a bad loan so the older borrower can keep his or her house in a state with a low homestead exemption. |
| Without a homestead floor, older Americans with just a bit more equity in their house than the state homestead exemption ($20,000 in North Carolina for a single person, for example) must pay the amount of this “nonexempt equity” to pay off unsecured creditors in chapter 13, which generally requires selling their house because they don’t have liquid assets of this amount. So someone with $30,000 in equity in NC could not utilize the chapter 13 modification provision and save their house without this change. |
| The provision is consistent with the 2005 amendment adding section 522(b)(3)(C) and (d)(12) that protect pension rights for all debtors, no matter which set of exemptions they utilize. That is because, for many older homeowners, their life savings are in their home equity. The $75,000 amount protected is, in fact, very modest compared to the pension benefits that can be protected. |
| 1 Resolution of disputes. The majority of circuits hold that bankruptcy judges have the discretion to hear all “core proceedings” that are integral to the bankruptcy case, such as claims and defenses raised as objections by the debtor. This is because bankruptcy is a collective proceeding, and the bankruptcy court can consider all interests better than an arbitrator with only two parties before him; applicable mandatory arbitration would govern “non-core” claims. A minority of circuits have found otherwise, however, insisting that all disputes be arbitrated, even the question of whether a creditor violated a bankruptcy stay. This will delay the resolution of disputes and frustrate the ability of the court to treat all creditors equally. We recommend that Congress adopt the majority view. 2 Preservation of consumer protection claims in bankruptcy. It would appear to be common sense, and is the majority rule, that a consumer protection claim that a borrower has against their lender is available to be pursued until the statute of limitation runs, or for some claims, when the sale of the house occurs. However, a minority of courts have held that a foreclosure judgment wipes away these claims. That is so even if the claim is that a lender committed fraud to convince a borrower to take out an abusive mortgage, which caused the foreclosure. This provision would simply clarify that the debtor can still raise consumer protection claims in bankruptcy even if there has been a foreclosure judgment entered against him or her, which is common since families often only declare bankruptcy after this judgment has been obtained. |
| Appendix C – Foreclosure Timelines |
| | | Confirmation of | | Minimum estimated time | Maximum estimated | | State | Sale Held | Sale | Redemption Period | complete sale | time complete sale | | AL | 49-74 (days) | | 365 days | 414 | 439 | | AK | 105-108 | | 365 days * | 105 | 473 | | AR | 80 | | 365 days* | 80 | 445 | | AZ | 102 | | 30-180 days* | 132 | 282 | | CA | 117-120 | | 365 days* | 117 | 485 | | CO | 91 | | 75 days | 166 | 166 | | | court | | | | | | CT | decides | 3-4 weeks | court decides | court decides | court decides | | DC | 75-90 | | None | 75 | 90 | | DE | 170-210 | 200-300 | None | 370 | 510 | | FL | 135 | | None | 135 | 135 | | GA | 37 | | None | 37 | 37 | | HI | 160-220 | 195-260 | None | 355 | 480 | | IA | 160 | | 20-365 days | 180 | 525 | | ID | 150 | | 365 days | 515 | 515 | | IL | 300 | | 90 days | 300 | 390 | | IN | 251 | | None | 251 | 251 | | KS | 130 | | 3-12 mos | 220 | 495 | | KY | 147 | 3 weeks | 1 year | 533 | 533 | | LA | 180-240 | | None | 180 | 240 | | MA | 75 | | None | 75 | 75 | | MD | 46 | 30-60 | court decides | court decides | court decides | | ME | 240 | | 90 days | 330 | 330 | | MI | 60 | | 30 days - 1 yr | 90 | 425 | | MN | 90-100 | | 6-12 months | 270 | 465 | |
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