BILL ANALYSIS �
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THIRD READING
Bill No: AJR 40
Author: Skinner (D), et al.
Amended: As introduced
Vote: 21
ASSEMBLY FLOOR : 53-22, 7/5/12 - See last page for vote
SUBJECT : Mortgages
SOURCE : Author
DIGEST : The resolution urges the Federal Housing Finance
Agency (FHFA), and specifically its director, Edward
DeMarco, to immediately allow the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac) to offer principal reductions to
homeowners who owe more than their homes are worth.
ANALYSIS : This resolution makes the following findings
and declarations:
1. Since 2008, more than half a million Californians
have lost their homes to foreclosure and another half
million homes are currently in foreclosure or are at
imminent risk of foreclosure.
2. There are over two million California homes currently
"underwater" where property owners owe more than what
the home is worth and collectively the value of these
homes is over $196 billion.
CONTINUED
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3. Foreclosures too often become vacant, boarded-up
hazards, lower surrounding property values, increase
criminal activity in neighborhoods, and discourage
economic development and investment in communities.
4. The wave of foreclosures that has already hit
California substantially decreased tax revenue, which
led to budget deficits, increased unemployment, and
billions of dollars in cuts to schools, health
services, and other vital services.
5. Fannie Mae and Freddie Mac, the two companies that
control over one-half of the home loans in the United
States, and specifically over 60% of California
mortgages.
6. The director of the FHFA, Edward DeMarco, has
steadfastly opposed allowing Fannie Mae or Freddie Mac
to offer principal reductions to homeowners who owe
more on their homes than what they are worth.
7. On February 9, 2012, Attorney General Kamala Harris
announced that California will join a national
servicing settlement that is estimated to provide up to
$40 billion in benefits to borrowers across the country
and much of these benefits include a program of
principal reductions.
8. Fannie Mae and Freddie Mac refused to participate in
the national settlement agreement, meaning more than
one-half of the home loans in the country will see no
relief from this agreement.
9. Many economists and housing experts agree that
principal reductions are the most helpful tool for
limiting the number of foreclosures.
10. By refusing to allow principal reductions, the FHFA
is ensuring that tens of millions of homeowners
nationwide will continue to owe more on their home
loans than what their homes are worth.
11. Allowing principal reductions for Fannie Mae and
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Freddie Mac mortgages could deter another wave of
costly foreclosures nationwide.
Comments
The Housing and Economic Recovery Act of 2008 (HERA), which
created FHFA, granted the Director of FHFA discretionary
authority to appoint FHFA conservator or receiver of the
Fannie Mae and Freddie Mac (Enterprises) "for the purpose
of reorganizing, rehabilitating, or winding up the affairs
of a regulated entity." This response came about from
substantial losses in the portfolios of the Enterprises
that amounted to combined losses of $261 billion from 2007
to the third quarter of 2011. Additionally, as of December
31, 2011, Treasury has committed over $183 billion to
support the Enterprises.
The key issue raised by this resolution is that the
Enterprises participate in loan modifications via the Home
Affordable Mortgage Program, but FHFA the conservator of
the Enterprises refuses to allow them to engage in
principal reduction of loans in those cases where it might
prevent foreclosure.
Much of the debate regarding FHFA refusal to participate in
principal reductions began in correspondence between FHFA
and the United State Congress, House Committee on Oversight
and Government Reform. In response to a request from the
Committee, FHFA provided an analysis, on January 20, 2012,
of the impact of principal reduction on the performance of
loans in the Enterprises' portfolio. In summary FHFA
provided:
In considering a program of principal reduction for
underwater borrowers, FHFA used the net present value
model developed to implement the Home Affordable
Modification Program (HAMP). Using the HAMP NPV model
for borrowers with mark-to-market loan-to-value (LTV)
ratios greater than 115 percent, FHFA compared
projected losses to Fannie Mae and Freddie Mac from
borrowers receiving principal forbearance
modifications to borrowers receiving principal
forgiveness modifications as allowed in the HAMP
program. The model, and hence the analysis, takes
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into account the sustainability of the modifications
and assumes that principal forgiveness reduces the
rates of re-default on the loans to a greater extent
than would forbearance. However, in the event of a
successful modification, forbearance offers greater
cash flows to the investor than forgiveness. The net
result of the analysis is that forbearance achieves
marginally lower losses for the taxpayer than
forgiveness, although both forgiveness and forbearance
reduce the borrower's payment to the same affordable
level.
It is important to note that it appears that the analysis
conducted by FHFA examined the costs associated with
principal writes of all of the Enterprises' loans, not just
those where the borrower could reach a sustainable payment.
Subsequent to this correspondence, on May 1, 2012, the
Committee sent a letter to FHFA detailing findings that,
contrary to testimony provided by Acting Director Demarco,
that Fannie Mae has examined principal reduction and that
their research revealed that principal reduction would
indeed reduce taxpayer losses on the Fannie Mae portfolio.
The overall conclusion of the letter was that:
Contrary to your testimony, we have now obtained a
wide range of internal documents demonstrating that
Fannie Mae officials conducted detailed, substantive
analyses and concluded years ago that principal
reduction programs have enormous potential to save
U.S. taxpayers significant amounts of money by
reducing overall losses from foreclosures following
default.
The core of the disagreement between FHFA and those in
favor of principal reduction is that FHFA has hid behind a
financial analysis of the impact of principal reduction on
their fiscal stability, yet their own analysis implies that
the decision to not do principal reduction was a result of
ideological belief, not the desire to protect taxpayers.
FISCAL EFFECT : Fiscal Com.: No
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ASSEMBLY FLOOR : 53-22, 7/5/12
AYES: Alejo, Allen, Ammiano, Atkins, Beall, Block,
Blumenfield, Bonilla, Bradford, Brownley, Buchanan,
Butler, Charles Calderon, Campos, Carter, Cedillo,
Chesbro, Davis, Dickinson, Eng, Feuer, Fletcher, Fong,
Fuentes, Furutani, Galgiani, Gatto, Gordon, Hall,
Hayashi, Roger Hern�ndez, Hill, Huber, Hueso, Huffman,
Lara, Bonnie Lowenthal, Ma, Mendoza, Mitchell, Monning,
Pan, Perea, V. Manuel P�rez, Portantino, Skinner,
Solorio, Swanson, Torres, Wieckowski, Williams, Yamada,
John A. P�rez
NOES: Bill Berryhill, Donnelly, Beth Gaines, Garrick,
Grove, Hagman, Halderman, Harkey, Jeffries, Jones,
Knight, Logue, Mansoor, Miller, Morrell, Nestande,
Nielsen, Norby, Olsen, Silva, Smyth, Wagner
NO VOTE RECORDED: Achadjian, Conway, Cook, Gorell, Valadao
JJA:n 8/28/12 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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