Fannie Mae Borrower Certification And Authorization: Fill & Download for Free

This is an excellent question that people really need to know more about.When we solve a problem, after a while, we tend to forget what solved the problem and go back to what we used to do that caused the thing to go over the cliff in the first place.That was the 2008 mortgage and financial crisis, as it forgot the lessons of the Great Depression.History up to the Great DepressionIn the 1920’s, when the economy was booming and it seemed like the party would never stop, banks lent out a ton of money on credit, with the presumption that all that money would be paid back and that there was sufficient collateral to cover it.Except, there wasn’t.One of the biggest assets that people might own that a bank could recover is real property. As Will Rogers once noted: “Buy land. They ain’t makin’ any more of the stuff.” Real property was something that pretty much always appreciated in value.Prior to the early 1900’s, most people didn’t own their own homes. Most people rented. Many lived in tenements and apartments in cities, or lived as tenants on farms in rural areas. Land speculators often bought what was left of the government land grants as the frontier closed.But, in the 1920’s, that began to change as banks felt more confident in lending credit for new construction. There were significant speculation bubbles. People bought property and built homes on future credit that wasn’t based on anything but hope.And as the stock market ticked ever higher and higher, banks bet on it. With the deposit money of their customers.And then the Stock Market Crash of 1929 hit.Banks that were significantly overleveraged and undercapitalized were hit hard. Many just failed, and those who had their deposits at banks that became insolvent just lost everything. There was no deposit insurance. If your bank went under, you were screwed out of your entire savings.And if you lost your job, that meant you also lost any means of continuing to pay back that home loan.Additionally, there were suddenly vast quantities of new construction for sale… that nobody could afford any longer. That drove down property values everywhere.Suddenly, your property that was worth $10,000 last year might now only be worth $5,000. But you might still owe $8,000 - what we call “underwater.” If you default or declare bankruptcy, the bank loses. And you’re out on the street.And then, what could the bank do with the house? How could they sell it? Nobody was buying. So, the bank suddenly has a ton of illiquid assets.More foreclosures in a neighborhood continues to lower the property values further, and the destructive cycle just ends up repeating itself.The Hoover administration tried economic protectionism. At the administration’s pushing, Congress passed the Smoot-Hawley Act of 1930, which imposed schedules of high tariffs on over twenty thousand types of imported goods, to protect American business, by golly.It backfired spectacularly and greatly exacerbated the worsening Depression.Weather conditions didn’t help. A severe drought ravaged the Midwest and Great Plains starting in 1930. Farmers had been using what in retrospect were poor farming practices, tearing down line fences and forest windbreaks and not planting cover crops for winters. The thin layer of good topsoil in the Great Plains turned to dust and became an ecological nightmare.Farms started going under as crops failed. The Smoot-Hawley tariffs only made things worse.Additionally, the money supply dried up. The banks that survived, like J.P. Morgan Chase, just turned off the credit spigot to stay afloat. They stopped lending. Why? Again: illiquid assets. The banks were holding on to all these properties and other assets that they couldn’t sell. And people didn’t trust the banks because so many had lost everything depositing their savings there. Because the banks couldn’t sell anything they had, and nobody would give them any cash, they didn’t have any money to give out.Part of the problem was the gold standard. Under the Federal Reserve Act, at least 40% of the money in circulation had to be backed by gold reserves held by the federal government. So, there was no modern tool of being able to print more money to help increase liquidity.On top of that, gold became more expensive. Mortgages often had clauses that allowed banks to demand repayment in gold because of the gold standard. By 1932, that resulted in a disparity in payment between the dollar and the value of gold that meant that if a debtor was forced to repay in gold, it could cost him as much as $1.69 for every dollar he owed. This led to more bankruptcies and foreclosures still.Because of the tariffs, the lack of money supply, the collapse of agriculture, and lack of consumer spending, rampant deflation initially set in. This made exported American goods increasingly more expensive for overseas importers, even where other nations had not instituted retaliatory tariffs of their own. Manufacturing began to collapse. The steel industry followed.And the Depression spiraled out of control.When Roosevelt took over from Hoover in 1932, the nation was becoming increasingly desperate.The New DealRoosevelt ran on a radical new idea that he called “The New Deal.” The premise was that the government would intervene in the economy and prop it up through deficit spending and government borrowing. The New Deal would create government programs to put people back to work and get people back to farming and building things, and that eventually, once people got back on their feet, the government could take those supports out.Various New Deal reforms were leveled at the financial sector to try to get the credit flowing again.One reform was put on the banks directly: the Glass-Steagall Act. One of the problems with the banking crisis was that banks could gamble with depositor’s money. The Glass-Steagall Act separated investment banks from commercial banks. Investment banks are gamblers. These deal with stock and bonds and venture capital and hedge funds and Wall Street. Commercial banks are the Savings and Loan where you put your nest egg. The Glass Steagall Act put a firewall between the two. The idea was that Wall Street could melt to the ground and Main Street wouldn’t go with it.Keep this in mind. It will be important later.Another was to protect depositors. Commercial banks would be required to pay into a new Federal Deposit Insurance Corporation: the FDIC, which would make sure that depositors would get paid back if the bank collapsed. That encouraged people to trust banks again. People would deposit their money, and banks could use that money to start giving out loans again.A third was to help reduce the risk of default on certain types of loans through surety agreements. Sureties had been around forever: they’re a promise to pay a debt if the original debtor defaults.The Federal government aimed these programs at home loans in particular, to try to reduce the homelessness problem. And so, in 1938 with the National Housing Act, the government formed the Federal National Mortgage Association, or FNMA. FNMA, or “Fannie Mae,” would buy the mortgages from the banks, who would continue to “service” the mortgages. From the perspective of the consumer, it looked just like their ordinary transaction: get a loan from the bank, pay the bank. The bank kept some money for “service fees,” and the Feds took over the loan, and importantly: the risk of default. This created a secondary market for mortgages for the first time in history.But Fannie would only buy that mortgage if it met certain criteria, such as debt to income ratios, term of the loan, and more. If banks wanted to make other loans, that was fine, but Fannie wouldn’t buy them.And the program basically worked. Banks started lending again. Credit slowly started to thaw out. Banks started getting more liquidity in their balance sheets. People started being able to buy homes again.After World War II, the housing market took off again, fueled in part by the GI Bill and a push for suburbanization and the creation of easily duplicated, cheap ranch houses on a standardized template.But in the background still driving things along was always Fannie Mae and the prime 30 year fixed-rate mortgage, which had become as much a part of the standardized American experience as baseball. Housing prices rose steadily home ownership became a stable part of the American economy. Virtually every person in the country could see a viable path to owning their own home.By the 1960’s, FNMA owned more than 90% of the residential mortgages in the United States and individual home ownership had risen to the highest levels ever recorded. This led to the greatest expansion of the middle class in history.So, of course, like all wildly successful government programs, we had to fix it.PrivatizationIn 1954, FNMA was semi-privatized into a public-private hybrid where the government owned the preferred stock (with better voting rights within the corporation,) and the public held the common stock (which gave dividends, but inferior voting rights).And in 1968, Fannie Mae was privatized entirely, with a small slice of it (known as Ginnie Mae) carved off to maintain Federal Housing Authority loans, Veterans Administration loans, and Farmer’s Home Administration mortgage insurance. Because Fannie Mae had a near monopoly on the secondary mortgage market, the government created the Federal Home Loan Mortgage Corporation to compete with it: Freddie Mac.By 1981, Fannie and Freddie were doing well as private companies, and Fannie came up with a great idea that had been done in limited settings: pass-through mortgage derivatives. They would bundle up various mortgages and sell them as a type of bond to investors. Investors loved the idea. The housing market had been extremely stable for nearly fifty years and offered a modest, but highly reliable return. And so the commercial home loan mortgage backed security was born.Keep this in mind. It will be important later.The Savings and Loan CrisisBy the early 1980’s, the economy had been stable for 30 years (more or less,) and thanks to the Glass-Steagall Act, commercial banks were doing okay even with the “stagflation” of the 1970’s. Home prices continued to rise about on par with wage growth.But one type of commercial banks, the Savings and Loan banks, wanted to do better than okay. S&L’s were the kind of bank in It’s a Wonderful Life. S&L’s were specifically singled out in federal legislation, like credit unions, for a single purpose: to promote and facilitate home ownership, small businesses, car loans, that sort of stuff.A business-friendly Congress agreed. They passed two laws in 1980 (signed by Jimmy Carter) and 1982 (Signed by Ronald Reagan) that allowed banks to offer a variety of new savings and lending options, including the Adjustable Rate Mortgage, and dramatically reduced the oversight of these banks.Adjustable rate mortgages work by locking in a fixed rate for a short term, and then after that initial term, the mortgage rate would re-adjust every additional term after that. If the prime interest rates set by the Federal Reserve stayed high, lenders would get hammered.But S&L’s had a fix in mind for consumers: just keep refinancing your home every time the first term is up. Home prices would just always continue to rise, right? They could collect closing costs every couple of years, and consumers remained essentially chained to them in debt with a steady stream of revenue that would always be secured if something happened. It was perfect.Keep these types of mortgages in mind. It will be important later.By the mid-1980’s, the lack of oversight allowed S&L’s to start making riskier and riskier decisions, offering certificates of deposit with wild interest rates, as much as eight to ten percent. They were exempted from FDIC oversight, while still keeping deposits federally insured (what could go wrong there, right?)And then the Federal Reserve, in an effort to reduce inflation, raised short-term interest rates, which sent ripple effects through these S&L’s, who had been made very vulnerable to that particular issue through these bad decisions, lack of appropriate capitalization, and overpromising depositors.By 1992, almost a third of savings and loan banks nationwide had collapsed.This crisis led to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which put back some of the same oversights that had been taken off because people wanted to make more money, particularly better capitalization rules (which were tied to risk,) increased deposit insurance premiums and brought back some FDIC oversight, and reduced these banks’ portfolio caps in non-residential mortgages.Keep this in mind. It will be important later.The Repeal of Glass-SteagallRemember how back in the 30’s, in the midst of the Great Depression, we instituted that firewall between investment banks and commercial banks?Again, it worked so well, we had to fix it.Starting in the 1960’s, the federal regulators began to start to allow commercial banks to get back into the securities game again. The list was limited, and was supposed to stay in relatively safe stuff.This accelerated under Reagan’s policy of deregulation, and continued under Clinton in the 1990’s. By 1999, Bill Clinton declared that Glass-Steagall no longer served any meaningful purpose, and most people had declared it dead well before that. The law was officially repealed in 1999 with the Gramm-Leach-Bliley Act.Immediately, investment and commercial banks start merging again. Bear Stearns, Lehman Brothers, Citibank, all of these investment banks start buying out the commercial banks or merging.And there’s a culture difference between those.Remember: investment banks are gamblers. These are the Wall Street guys. They’re risk takers. They’re hedge fund managers. These are your Gordon Gekko type guys. Commercial banks are Main Street guys. They’re generally conservative, George Bailey types.And the investment banker culture won out over the course of the 2000’s. George Bailey starts snorting coke and putting on Ray Bans with a blazer and jeans.Sub-Prime, NINJA, and ARM LoansIn the early 1990’s, affordable housing started to become a greater and greater issue. George H.W. Bush signed legislation in late 1992 amending Fannie and Freddie’s charters to push them to make loans to people with lesser means than the traditional prime criteria. The Clinton Administration continued pushing Fannie and Freddie to accept more low and moderate income earners.That meant taking on riskier loans.The Clinton administration put rules in place in 2000 to curb predatory lending practices, and rules that disallowed those risky loans from counting towards their low-income targets.The Bush administration took those predatory lending rules off in 2004, and allowed those risky, “sub-prime” mortgages to count towards the low-income targets set by Housing and Urban Development.Remember those ARM mortgages?Heh, heh. This is getting long, and you probably glossed over that, didn’t you? I told you it was going to be important.Banks started making riskier and riskier loans, often those ARM loans. They could meet their HUD targets and make tons of money. And again: the gravy train was endless, right? The housing market had not lost value for over fifty years, even in the recessions of the 70’s and 80’s.So, they put more people in houses. Bigger houses. More expensive houses. The economy was doing good. New construction was hot. Contractors couldn’t build the McMansions fast enough.Banks started a race to the bottom with these sub-prime loans, getting all the way to NINJA loans: No Income, No Job, No Assets required. You’re a homeless person selling Etsy products out of your car? You’re already prequalified on a quarter-million subdivision home with a quarter-acre. Congratulations.As long as you could afford the payments, you were in.De-regulationIn the early 2000’s, the Bush administration wanted to keep the economy going. There was a low-level recession from March 2001 to November 2001 following the dot-com crash. The administration lifted a number of securities and financial sector oversight rules. One of those rules was about capitalization.Remember that? I told you that was going to be important.Capitalization requirements are how much reserve cash a bank needs to keep on hand to prevent collapse if something happens, against their liability sheets. Remember: that’s how banks got in trouble before the Great Depression and again right before the Savings and Loan Crisis. They took on too many liabilities and didn’t have enough capital to actually pay it all out.The Bush administration relaxed the rules on required capitalization and what assets could count as capital. Some of those assets turned out not to be very useful.Collateralized Debt Obligations and the Mortgage Backed SecurityRemember, back in 1981, when Fannie starts issuing those mortgage backed securities, re-selling them as bonds with a low, but reliable interest rate?That gets more complicated after 2004–2005 with the increased use of a financial tool called the collateralized debt obligation. Basically, a CDO is just a promise to pay investors in a sequence based on the cash flow from something the CDO invests in. The rate of return was tied to how risky the CDO was.In the 70’s and 80’s, CDOs were pretty safe, mundane things. They were basically like index funds; they invested in a lot of stuff and did okay. But by the mid-2000’s, CDOs were becoming riskier and riskier, while providing more and more reward. CDOs bought up mortgages like crazy, because they had increasingly higher interest rates as the subprime mortgages started taking off.But people were nervous about investing solely in these high-risk CDOs. And so, investment banks that bought up those mortgage-backed securities started to bundle together some high-risk mortgages with some regular, low-risk mortgages and promising that they were safer.And then some investment banks started to lie about how many of those high-risk mortgages were in them. Why? Again: the housing market was super-stable and always going up. Those loans only looked high-risk on paper, right? I mean, those debtors could always just keep refinancing every couple of years.So banks bought up those assets and added them to their capitalization sheets.You see it, right? You see the problem here? Not yet?Keep this in mind. It will be important in just a minute.The CollapseI remember being in college in the early 2000’s, and asking the loan officer at our local bank how some of the people I knew were making maybe $10–12 an hour could afford these massive homes and boats and jet skis and campers. My parents were teachers; they weren’t doing bad, but we couldn’t afford all that and I knew they were doing better than some of those people. The loan officer shook his head and said, “They can’t. They can afford the payments.”Some of those people didn’t have furniture in their homes. If they had a party, they rented furniture for a couple days. I’m serious. That was a thing. Many of them were in deep, crippling credit card debt, paying off the balances of one with another, and justifying it with the idea that it would be okay when the next raise kicked in.It was a classic speculation bubble.Then in late 2006–2007, that bubble burst.The housing market became oversupplied. People stopped buying the new construction and the existing homes as much. And home values started to drop.And suddenly, because home values plateaued and then dropped, so too did the little bit of equity that many of these purchasers, in debt up to their eyeballs, had in their homes. Without more equity, they couldn’t refinance. And because they could’t refinance, those ARM loans or other loans kicked in, and the interest rates on them skyrocketed.And suddenly, they couldn’t make the payments anymore.And then they went into default on their mortgages.Followed by foreclosure.And often bankruptcy.It turned into a vicious cycle. Once one or two neighbors end up losing their homes in foreclosure, it affects the property values of everyone else around those properties like a contagion. Healthier borrowers started to become impacted as property values declined and now they couldn’t refinance.In 2007, lenders foreclosed on 79% more homes than in 2006: 1.3 million foreclosures. In 2008, this skyrocketed another 81% still: 2.3 million. By August of 2008, nearly one in ten mortgages nationally were in default and foreclosure proceedings. By one year later, this had risen to over 14% nationally.The RecessionRemember, the financial sector had heavily invested in all of those housing market securities. They thought they were safe. They thought that the housing market would never go anywhere but up. They built their whole foundation on it.And they had relied on those securities to meet their capitalization requirements.Securities that suddenly turned out to be nearly worthless.Huge banks ran out of liquid cash almost immediately. This is what happened to Bear Stearns, Lehman Brothers, Goldman Sachs, Citibank, and more. They were suddenly holding on to billions upon billions of dollars of assets that were either worthless, or completely frozen. They couldn’t sell the bits of stuff that was even worth anything.And because their assets weren’t liquid, they didn’t have money to lend anymore.And that lack of credit is what grinds the economy to a halt.That impacted every sector of business in the United States. Which impacted every sector of business in the world. And that meant that businesses started having to lay people off because they couldn’t get the money to keep paying them.And then because those people lost their jobs, they started to default on their mortgages. Which rippled through the CDO market again.This was why it was so critical for the Federal Reserve to buy those toxic assets and provide the banks with liquid cash in their place. They had to get the credit flowing again to re-start the gears of the economy. Without it, we almost certainly would have seen a full repeat of the Great Depression.And that brings us to today.That’s the abbreviated, oversimplified explanation. It’s more complicated than this, and there’s other factors that contributed, but that’s kind of the main story in basic terms. That’s roughly how 10 million homes went into foreclosure.And we still haven’t fully recovered. Over twice as many people rent as opposed to own. Less than one-third of people who have lost a home in foreclosure in the last decade will be able to repurchase another again. Roughly 2/3ds of those people who lost their homes have so damaged their credit that they will never qualify again. Hundreds of thousands, if not millions more, were so emotionally traumatized by the experience that they simply refuse to go through it again.And that number of renters to owners is substantially higher for my generation, the Millenials, who have never seen any substantial portion of the post-2008 recovery. We still haven’t made up the wages that would allow us to save enough to purchase, even setting aside the massive increase in student debt we carry.75% of my generation wants to own a home. Less than 35% do.And, in case reading this wasn’t chilling enough for you, the present administration has been lifting some of the exact rules and regulations that were put into place after the 2008 collapse that were lifted in 2004 that were put in place after the 1980’s collapse after those were lifted. Because it worked so well the first two times.Mostly Standard Addendum and Disclaimer: read this before you comment.I welcome rational, reasoned debate on the merits with reliable, credible sources.But coming on here and calling me names, pissing and moaning about how biased I am, et cetera and BNBR violation and so forth, will result in a swift one-way frogmarch out the airlock. Doing the same to others will result in the same treatment.Essentially, act like an adult and don’t be a dick about it.Look, this is pretty oversimplified. Ph.D. theses have been written about this. I’m trying to make it at least remotely accessible to those with the patience to read it. Don’t be pedantic about it, please?Getting cute with me about my commenting rules and how my answer doesn’t follow my rules and blah, blah, whine, blah is getting old. Stay on topic or you’ll get to watch the debate from the outside.Same with whining about these rules and something something free speech and censorship.If you want to argue and you’re not sure how to not be a dick about it, just post a picture of a cute baby animal instead, all right? Your displeasure and disagreement will be duly noted. Pinkie swear.If you have to consider whether or not you’re over the line, the answer is most likely yes. I’ll just delete your comment and probably block you, and frankly, I won’t lose a minute of sleep over it.Debate responsibly.

Here, I will focus on some of my experiences during this crisis of the past, to convey an impression of the downside of global economy and its effects on young people are like. However, I will also generalize beyond my own experiences on the basis of both broad and particular observations that I have had the opportunity to make these past two years. For responsible and meritorious members of my generation, the crisis has brought about the kinds of struggles that they thought could be avoided by sufficient hard work and learning. Indeed, it is undeniable that the future of virtually every young person today hangs on a precipice due to adverse political and macroeconomic developments.Unemployment, Underemployment, and the Complete Devaluation of College EducationOne important shift over the past two years has been with regard to the degree – or lack thereof – to which a college education is valuable for a young person’s employment prospects. Two generations ago, a college degree was a virtual guarantee of a comfortable, well-paying office job for as long as one wanted it. One generation ago, one’s prospects for such a job out of college were still good, provided that one performed well in college and received one’s degree in a remunerative field. This was the expectation with which the present generation of graduates was raised. However, even before the present crisis, a bachelor’s degree had become devalued through the considerable increase in the number of people seeking and receiving it. Many people had been incentivized by extensive federal subsidies to seek “educations” for which they had neither the inclination nor, perhaps, the merit. Colleges responded with astronomical escalations of tuition (since demand increased and they figured the federally aided students could afford it), lowering of academic standards, and greater tolerance toward the “party school” atmosphere. It became difficult for employers to establish whose bachelor’s degree was a valid signaling mechanism for merit, and whose was a joke.Now, however, a bachelor’s degree by itself – even from a private college with rigorous standards – will not earn even a job at a fast-food restaurant. Good grades have also ceased to be a gateway to employment or to much else that is related to finances. Indeed, I know many high-performing students in my graduating class who, because their only “official” qualifications were a bachelor’s degree and good grades, ended up moving in with their parents and remain there to this day. The best students among the group that relied on college alone have become woefully underemployed. I knew, for instance, a high-achieving English major who ended up working at a drugstore pharmacy for minimum wage and a perceptive philosophy major who wandered around doing odd jobs, not quite sure what, if anything, he would find from month to month. The tragedy is compounded by the fact that it is hard even to become underemployed for young college graduates; many employers paying near the minimum wage have begun to snub “overqualified” candidates, for fear that these individuals might be dissatisfied with the parameters of a standard convenience-store or fast-food-restaurant job. Others have gone on to graduate school and may be earning minimal stipends for serving as teaching assistants – but this simply pushes their dilemma back a few years and may even place their finances in greater jeopardy when they graduate several years from now and find that they have few tangible assets with which to survive the coming hyperinflation.I graduated from a well-known private liberal arts college as the salutatorian of my class, with three majors in economics, mathematics, and German. My majors and grades did not, however, earn me my job. Rather, I was hired because of the four actuarial exams I passed while in college, on my own time and initiative. The exams helped me bypass the old notorious Catch-22 of lack of work experience leading to lack of job leading to lack of work experience – since the hiring rules of the organization for which I work consider two passed actuarial exams to be the equivalent of one year of work experience. But even with those actuarial exams, it was a matter of great fortune that I found a job at all. When I began taking the actuarial exams in 2007, it was under the assumption that even one exam was, in most cases, a gateway to a job. However, virtually no company was hiring for entry-level actuarial positions when I sent out my applications in early 2009; even candidates with four exams were routinely ignored by employers. The few positions that were available all required some number of years of work experience in the immediate field, even if they primarily involved entry-level work. To help me search, I contacted an actuarial staffing firm, which failed to update me regarding any prospects for months at a time. When I followed up periodically with its representative, I was told that no contact occurred because no openings had been found within the vast geographical area which I had specified as acceptable. Out of the fifty applications I circulated on my own, I received one job offer and accepted it. I am glad I did. I was one of the few people of my graduating class to secure a job prior to graduating, which made my life immensely easier than it might have been. To this day, I still recommend that college graduates looking for a job accept the first offer they get, because they will not likely get a second. Now, no number of professional exams or certifications would guarantee finding paid employment – although they certainly help. And of course, any individual’s chances of finding a job have deteriorated considerably since I conducted my search. Then there were about three unemployed persons for every job, on average; now the number is probably closer to ten, especially if discouraged workers are considered.What struck me about my own experience is that all the accomplishments which, throughout my earlier life, I perceived as “extra” and optional, were absolutely indispensable to just barely enabling me to secure a decently paying job and a modestly comfortable standard of living. I, like most of my peers, had been raised with the expectation that, for the best academic performers, the question was not whether one would get a job out of college, but rather which offer one would accept on the basis of the desirability of the job and its surrounding environment. This expectation has shown to be completely illusory. Moreover, a truly pitiable situation afflicts those individuals who, for lack of financial resources within their families, decided to accumulate debt in order to attend college – hoping, perhaps, that the value of the resulting degree would eventually pay for their loans and propel them well into the middle class. These individuals are now affected with crushing financial obligations – sometimes in the hundreds of thousands of dollars – and no means to repay them; moreover, student loan debt cannot even be erased via a bankruptcy. In my case, I had no educational debt for a variety of reasons, and I also accumulated a small amount of savings throughout college by engaging in a variety of writing ventures online and collecting prizes from essay contests. That, too, I considered to be optional and exceptional at the time. But that small pool of savings was vital to enabling me and my wife to survive during my transition into my job and later contributing to the substantial down payment that allowed us to obtain our house. Fortunately, all has turned out for the best for us thus far. But, along the way, there were numerous junctures where our lives could have deteriorated dramatically simply because of the vicissitudes of macroeconomic events. I am still astonished at the realization that if I did not pass those actuarial exams, or win those essay contests, or spend my lunch breaks and evenings in college writing articles for various online enterprises, I might either be financially dependent or on the verge of starvation today.The War of Fannie Mae and Freddie Mac against Responsible Young PeopleFor the fortunate young people who do manage to secure jobs during this crisis, the ordeal is far from over. In order for one to be truly financially secure in an era of impending hyperinflation, only the ownership of useful tangible property can suffice. Roughly, whatever material standard of living one had right before the hyperinflation is the maximum standard of living one will retain until a stabler currency regime returns. In particular, because the prices consumers have to pay tend to rise faster than those consumers’ earnings, only an abundance of durable goods can tide one over at a tolerable standard of living while the real costs of food and disposable goods continue to skyrocket. Owning a residence in a hyperinflation is a virtual necessity if one does not wish to be evicted for failing to pay astronomically rising rent. But what is it like for a responsible young person today to try to obtain a house? My own experience with this showed me how utterly irrational and unfairly discriminatory today’s centralized lending system is toward the young.Keep in mind that prior to obtaining my mortgage, I never had any serious debt – only a credit card which I used once a month as a formality, to build my credit history, and for which I promptly paid off the balance every time. I had also been a tenant for 3.5 years and had a perfect payment record for all of my bills. During most months, I can save circa 60% of my income and support both myself and my wife on the remainder. Both my wife and I have excellent credit scores – enough that, when we applied for a mortgage, we were told that, if we qualified for a loan at all, we would qualify for the best interest rate. In short, it is no exaggeration that we are about as financially responsible as people – not just young people – get. But apparently this was not enough for our bank.Since the collapse of the housing market, Fannie Mae and Freddie Mac, which have also been fully nationalized, have imposed highly stringent underwriting guidelines for all “conventional” loans backed by them – i.e., all loans not backed by the more lenient Federal Housing Administration (FHA). For those unfamiliar with the term, underwriting standards determine whether or not a loan even gets made, irrespective of what terms the borrower would qualify for if he were deemed eligible. Given that banks were perversely incentivized to employ ridiculously loose underwriting standards during the housing-boom years, it would seem sensible at a first approximation for these standards to become more rigorous. However, as is the tendency with federalized entities, the alleged “solution” to a problem becomes worse than the problem itself. The standards imposed by Fannie Mae and Freddie Mac today are arbitrary, draconian, and completely unrelated to the underlying factors that determine whether the borrower will repay the mortgage. They have contributed to many genuinely responsible people being denied the opportunity to purchase a house, while many genuinely irresponsible people continue to get loans. The recent passage of the gargantuan “financial reform” legislation in Congress (H.R. 4173 / S. 3217) would essentially foist these standards as federal law upon all mortgage lenders – meaning that, had my wife and I waited to apply for a loan until after the reforms’ implementation date, we would have been denied the opportunity to purchase a house altogether.One of the one-size-fits-all underwriting standards that obstructed our ability to get a “conventional” loan was the requirement that one have a certain number of active credit accounts in one’s credit report (irrespective of one’s credit score – and no, rental, utility, insurance, and telecommunications payments do not count under this arbitrary rubric). Because I never had a need for credit cards, I had only one, simply to build up my credit score. And, truly, what reasonable college student would ever need more than one? Apparently, I was required either to borrow and spend lavishly – replicating the consumer behaviors that fueled the current crisis – or to play the game of nominal credit card usage with multiple accounts. But nobody told me that, to remain financially responsible and in the good graces of Fannie Mae and Freddie Mac, I needed to buy my haircut with Card A, my groceries with Card B, a cup of coffee with Card C, and the occasional little trinket with Card D – and remember to pay off all of those little balances before the end of the month to avoid interest and fees. Understandably, I preferred to use my debit card – but this resulted in my failure to qualify for a “conventional” loan and ultimately cost me considerable money. Indeed, under the 2009 Credit CARD Act (H.R. 627), young people under the age of 21 are now prohibited from obtaining credit cards unless the cards are co-signed by a parent or the young people can verify independent sources of income (again, in accord with arbitrary and unduly stringent standards). This means that a person several years my junior, even if he wanted to, could not play the credit card game in college in order to qualify for a “conventional” loan later on.Fannie Mae and Freddie Mac did offer an alternative by which this requirement could be bypassed: a demonstration of a 12-month payment history in at least three non-credit accounts. While I had such a payment history, it so happened that, for my old apartment in college, my landlady would pay for the utilities but would collect their cost from all of the tenants as part of the monthly check. Thus, all those utility payments did not qualify under the federal standards.The other criterion – which will now likely be mandatory for all lenders to use – was conventional employment history, as documented via tax returns, at a certain income level and in the same occupation. While I did have some relatively minor earnings in college, I did not then have a “job” as conventionally defined, and certainly not anything that paid as well as actuarial work. The federal requirements insisted on two years of employment history in the same occupation, whereas I could only, at the time, document eight months. The unintended consequence of this requirement, of course, is that it would bar financially responsible young people from getting a “conventional” loan – simply for lack of having spent “sufficient” time in their post-college occupation. The loan I was applying for would have put me significantly below the threshold 30% debt-to-income ratio; moreover, I had a 20% down payment and a decent amount of savings left afterward. But no; two years was the cutoff threshold, and so I was denied a “conventional” loan for a house I could easily afford. My wife and I were able to get an FHA-backed loan, which required a substantial private mortgage insurance (PMI) premium, irrespective of the borrower’s amount of equity in the house. While most borrowers choose to finance the PMI into the loan, I decided to put this nonsense behind me right away and pay it upfront. To add insult to injury, the incompetence of certain staff at the lending bank resulted in the PMI being double-counted on five separate occasions as being both financed into the loan and paid upfront; apparently, nobody at this gargantuan, nationwide, probably bailed-out institution had ever encountered a 15-year, fixed-interest-rate, FHA-backed loan with the PMI paid upfront. Indeed, our closing was delayed because of the bank’s inability to promptly correct this error, and the error remained on the loan documents on the day of closing; it was only corrected via an emergency call to the bank by our title agent. If we were any less vigilant, less persistent, or less mathematically inclined, we might have acquiesced to becoming several thousand dollars poorer.The kinds of underwriting criteria I described did exist prior to the economic crisis, but they were typically not used as exclusionary criteria. Prior to the crisis, if a borrower failed to meet one underwriting benchmark, most banks would simply demand higher measures on the other benchmarks. Thus, a short employment history might be compensated by a low debt-to-income ratio, or an “insufficient” number of credit accounts might be overlooked because of a 20% down payment. Today, however, it is all or nothing – and this is likely to become the federal mandate throughout the entire future of U.S. mortgage lending. This will create an underclass of property-less young people whose earnings become consistently inflated away to pay for federal debts and obligations to special interests and some members of older generations who have acquired political connections and influence. Unless they can obtain houses shortly upon entering the job market – which the law would essentially prohibit, except for those few with the money to buy a house outright – young people will never be able to obtain them. This is because by the time they have accumulated enough “employment history”, the money they earned in the interim will have been devalued considerably. Slave labor, anyone?Implications and SolutionsThe disproportionate suffering of young people during this crisis has had significant and ongoing societal and economic implications. Among these are the following:• There is a growing disillusionment with the idea that merit and effort are connected with proportionate rewards: to many young people today, it seems that life will be poor no matter how hard one tries. This may continue for decades as the “lost generation” of recent college graduates is required to pay for the accelerating growth of federal obligations through higher taxes, hyperinflation, mandatory health insurance, diminished economic growth, and stifling restrictions on individual freedom. In the meantime, politically favored corporations and special interest groups have received unprecedented federal support for literally destroying wealth.• There has been a slowdown in workplace productivity because of a lack of young employees who are immersed in the latest technologies and do not shy away from them by habit. Older, less efficient ways of doing business continue to predominate because no influences counterbalance the habits of many older workers or, through the incentives of competition, invite those workers to step outside their comfort zones. While some of the more forward-thinking older workers continue to innovate technologically, there are not enough of them to assure a sufficient rate of progress without a steady influx of young people – people who grew up in the Internet era – into the workforce. Various federal mandates, corporate subsidies and bailouts, and other incentives to retain existing institutional structures may further ossify and perpetuate current massive business inefficiencies.• Some of the less determined young people have resigned themselves to continued financial dependence on their parents after college. This may eventually plunge the United States into the dilemma experienced in Italy and Spain, where many young people continue to be supported by their parents until their forties. This will lead, in many people, to a further extension of “carefree” adolescence, with its ill societal and economic effects. Worse yet, it will lead to the expectation that people remain infantilized until their health begins to decline – leaving no period of simultaneous youth and prosperity during which the greatest accomplishments are possible. The most responsible young people will still try to make it on their own, but they will increasingly be denied opportunities via coercive means – just as an enterprising teenager seeking to start his own business might be thwarted under today’s child labor laws.• In lower-income areas – particularly the urban ghettoes – marriage and family have become even further threatened, as young people in those areas see no avenues of financial mobility by which they are able to sustain a spouse and children. Meanwhile, those areas continue to be plagued by the refusal of many young people to take care of their out-of-wedlock children.• The nexus of pre-crisis institutions has survived the crisis largely intact because of federal support. These institutions have become a new feudal/guild system which perpetuates obsolete and wealth-destroying economic arrangements. As the record of the Congress and Obama administration has shown, any attempts at federally imposed “reform” only further entrench these institutions by enshrining some variant of existing practices into law. The dominant institutions are generally uninterested in hiring recent college graduates, whose cultural expectations – as epitomized by the free culture dominant on the Internet – are at odds with the hyper-compartmentalized, ultra-restricted, “cog in the machine” culture of the bailed-out, subsidized U.S. corporations.• Meanwhile, the honest, relatively politically unconnected businesses fear to hire young people because of the economic uncertainty engendered by federal policy. Who knows what sorts of mandated benefits, paperwork, and other federally imposed obligations those new employees will bring with them – especially several years in the future? Many business owners, even if they recognize that talented young people would benefit their enterprises, are deterred from hiring because of rational and understandable desires not to be burdened by the political challenges that might accompany such a decision.It seems that the present young generation has largely been designated as the party onto which the costs of this crisis shall be offloaded. This was not brought about by a deliberate central design (though many deliberate central designs contributed to it), but rather as the inexorable outcome of the currently dominant morass of “vampire” institutions which have outlasted their time. Only the replacement of these institutions can return a semblance of prosperity to most members of today’s “lost generation”. Moreover, only young people themselves can effectuate the desirable new institutions, which should be modeled on the free, open, and participatory culture of the Internet. There can be no better example than the Internet for what the creativity of even average humans can achieve when it is not strictly bound to narrowly defined established ways of doing things. Moreover, the Internet facilitates alternative methods of human interactions to those sanctioned by the bailed-out institutional establishment.I mentioned previously that anger is the warranted response of young people at the present predicament – for anger is a far better response than despair and depression. But not just any anger will do; it must be channeled constructively. Protest rallies and other publicity stunts, for instance, will accomplish nothing, while strikes or work slowdowns will only exacerbate the problem. No – the solution lies in more determination, more productivity, more achievement, more innovation – to overcome through the strength of mind and will the barriers posed by the obsolete dominant institutions. The young person’s best friend in this endeavor is technology, which dramatically amplifies a person’s productive capacity and, by implication, that person’s impact on the world. Technology challenges established media, financial institutions, and production methods. Information technology especially brings to the ordinary people a degree of self-sovereignty and mastery of the external world that the politically privileged have always attempted – and assiduously continue to attempt – to monopolize. Technology can provide free, legal access to education, art, and entertainment. It can remove most of the inefficiencies conventionally associated with communication. Most importantly, though, it brings with it a marvelous decentralizing cultural and economic shift that renders increasingly fewer areas of a person’s life inextricably dependent on established institutions. Young people today should create an alternative economy based on personal technology – which would also be largely independent of the manipulations of monetary authorities and might even counteract inflationary tendencies by increasing the quantity of goods “chased” by money. Such an economy is already manifest in the open-source and Creative Commons models which have surged in popularity online. The great challenge of our generation will be to bring this model into the realm of the most tangible goods imaginable. Fortunately, the rate at which technological knowledge advances has never been faster, even with this crisis. The key will be to implement potentially world-changing new knowledge.In effect, I am proposing a cultural resistance to the driving forces behind this crisis. This resistance is, in many ways, the diametrical opposite of the campus rebellions of the 1960s generation – the generation which currently occupies the dominant roles in our society. Instead of disdaining wealth, comfort, and respectability, today’s young people should strive for these values with renewed vigor – if only to show that the “vampire” institutions cannot defeat their aspirations to prosperity and happiness. Moreover, the profound injustices of the crisis and the enormous gap between achievement and reward existing today should motivate young people to strive for a society based in all its dimensions on the principle of merit – the principle that a person should rise and fall based on his individual qualities and achievements, not on the arbitrary, one-size-fits-all decisions of the parties that caused the crisis.To overturn the status-quo-preserving command-and-control collectivism of the dominant powers and replace it with an individualistic, meritocratic society characterized by rapidly accelerating technological progress of everyday relevance and visibility, young people today will need to accumulate resources of every kind, both through conventional and alternative channels. Any position, within or outside established institutions, that brings about access to such resources should be welcomed. For those fortunate to get any job at any institution – private or public, old or new – working with honesty and integrity to improve that institution – to imbue it with progress, justice, and respect for human rights and virtues – is in itself a praiseworthy endeavor; it will also counteract the crisis and the policies and practices that brought it about. Those who cannot find or do not need to find a job should still engage in activities that would advance an individualistic, technological, merit-based society. Such activities are abundantly available and include the creation of free media and software as well participation in unconventional volunteer activities – such as connecting one’s computer to a distributed computing project that performs technically useful or theoretically interesting computations. Finally, I recommend that all young people engage in at least one creative endeavor of their own choosing, on their own time, every day. It is important to always remember that one is an intelligent, rational human being with a creative faculty; doing only what one is told or what necessity requires is the surest way to dim that faculty. With the technologies available today to foster human creativity at the computer, there is no excuse anymore to simply “go with the flow” and avoid shaping the culture. And it is such creation that will win the world for the lost generation

FACT SHEET: President Obama’s Plan to Help Responsible Homeowners and Heal the Housing MarketIn his State of the Union address, President Obama laid out a Blueprint of America buicalling for action to help responsible borrowers and support a housing market recovery. While the government cannot fix the housing market on its own, the President believes that responsible homeowners should not have to sit and wait for the market to hit bottom to get relief when there are measures at hand that can make a meaningful difference, including allowing these homeowners to save thousands of dollars by refinancing at today’s low interest rates. That’s why the President is putting forward a plan that uses the broad range of tools to help homeowners, supporting middle-class families and the economy.Key Aspects of the President’s Plan• Broad Based Refinancing to Help Responsible Borrowers Save an Average of $3,000 per Year: The President’s plan will provide borrowers who are current on their payments with an opportunity to refinance and take advantage of historically low interest rates, cutting through the red tape that prevents these borrowers from saving hundreds of dollars a month and thousands of dollars a year. This plan, which is paid for by a financial fee so that it does not add a dime to the deficit, will:o Provide access to refinancing for all non-GSE borrowers who are current on their payments and meet a set of simple criteria.o Streamline the refinancing process for all GSE borrowers who are current on their loans.o Give borrowers the chance to rebuild equity through refinancing.• Homeowner Bill of Rights: The President is putting forward a single set of standards to make sure borrowers and lenders play by the same rules, including:o Access to a simple mortgage disclosure form, so borrowers understand the loans they are taking out.o Full disclosure of fees and penalties.o Guidelines to prevent conflicts of interest that end up hurting homeowners.o Support to keep responsible families in their homes and out of foreclosure.o Protection for families against inappropriate foreclosure, including right of appeal.• First Pilot Sale to Transition Foreclosed Property into Rental Housing to Help Stabilize Neighborhoods and Improve Home Prices: The FHFA, in conjunction with Treasury and HUD, is announcing a pilot sale of foreclosed properties to be transitioned into rental housing.• Moving the Market to Provide a Full Year of Forbearance for Borrowers Looking for Work: Following the Administration’s lead, major banks and the GSEs are now providing up to 12 months of forbearance to unemployed borrowers.• Pursuing a Joint Investigation into Mortgage Origination and Servicing Abuses: This effort marshals new resources to investigate misconduct that contributed to the financial crisis under the leadership of federal and state co-chairs.• Rehabilitating Neighborhoods and Reducing Foreclosures: In addition to the steps outlined above, the Administration is expanding eligibility for HAMP to reduce additional foreclosures, increasing incentives for modifications that help borrowers rebuild equity, and is proposing to put people back to work rehabilitating neighborhoods through Project Rebuild.1. Broad Based Refinancing PlanMillions of homeowners who are current on their mortgages and could benefit from today’s low interest rates face substantial barriers to refinancing through no fault of their own. Sometimes homeowners with good credit and clean payment histories are rejected because their mortgages are underwater. In other cases, they are rejected because the banks are worried that they will be left taking losses, even where Fannie Mae or Freddie Mac insure these new mortgages. In the end, these responsible homeowners are stuck paying higher interest rates, costing them thousands of dollars a year.To address this challenge, the President worked with housing regulators this fall to take action without Congress to make millions of Americans eligible for lower interest rates. However, there are still millions of responsible Americans who continue to face steep barriers to low-cost, streamlined refinancing. So the President is now calling on Congress to open up opportunities to refinancing for responsible borrowers who are current on their payments.Under the proposal, borrowers with loans insured by Fannie Mae or Freddie Mac (i.e. GSE-insured loans) will have access to streamlined refinancing through the GSEs. Borrowers with standard non-GSE loans will have access to refinancing through a new program run through the FHA. For responsible borrowers, there will be no more barriers and no more excuses.Key components of the President’s plan include:• Providing Non-GSE Borrowers Access to Simple, Low-Cost Refinancing: President Obama is calling on Congress to pass legislation to establish a streamlined refinancing program. The refinancing program will be open to all non-GSE borrowers with standard (non-jumbo) loans who have been keeping up with their mortgage payments. The program will be operated through the FHA.Simple and straightforward eligibility criteria: Any borrower with a loan that is not currently guaranteed by the GSEs can qualify if they meet the following criteria:• They are current on their mortgage: Borrowers will need to have been current on their loan for the past 6 months and have missed no more than one payment in the 6 months prior.• They meet a minimum credit score. Borrowers must have a current FICO score of 580 to be eligible. Approximately 9 in 10 borrowers have a credit score adequate to meet that requirement.• They have a loan that is no larger than the current FHA conforming loan limits in their area: Currently, FHA limits vary geographically with the median area home price – set at $271,050 in lowest cost areas and as high as $729,750 in the highest cost areas• The loan they are refinancing is for a single family, owner-occupied principal residence. This will ensure that the program is focused on responsible homeowners trying to stay in their homes.Streamlined application process: Borrowers will apply through a streamlined process designed to make it simpler and less expensive for borrowers and lenders to refinance. Borrowers will not be required to submit a new appraisal or tax return. To determine a borrower’s eligibility, a lender need only confirm that the borrower is employed. (Those who are not employed may still be eligible if they meet the other requirements and present limited credit risk. However, a lender will need to perform a full underwriting of these borrowers to determine whether they are a good fit for the program.)Program parameters to reduce program cost: The President’s plan includes additional steps to reduce program costs, including:• Establishing loan-to-value limits for these loans. The Administration will work with Congress to establish risk-mitigation measures which could include requiring lenders interested in refinancing deeply underwater loans (e.g. greater than 140 LTV) to write down the balance of these loans before they qualify. This would reduce the risk associated with the program and relieve the strain of negative equity on the borrower.• Creating a separate fund for new streamlined refinancing program. This will help the FHA better track and manage the risk involved and ensure that it has no effect on the operation of the existing Mutual Mortgage Insurance (MMI) fund.EXAMPLE: How Refinancing Can Benefit a Borrower With a Non-GSE Loan A borrower has a non-GSE mortgage originated in 2005 with a 6 percent rate and an initial balance of $300,000 – resulting in monthly payments of about $1,800. The outstanding balance is now about $272,000 and the borrower’s home is now worth $225,000, leaving the borrower underwater (with a loan-to-value ratio of about 120%). Though the borrower has been paying his mortgage on time, he cannot refinance at today’s historically low rates. Under the President’s legislative plan, the borrower would be eligible to refinance into a 4.25% percent 30-year loan, which would reduce monthly payments by about $460 a month.• Refinancing Plan Will Be Fully Paid For By a Portion of Fee on Largest Financial Institutions: The Administration estimates the cost of its refinancing plan will be in the range of $5 to $10 billion, depending on exact parameters and take-up. This cost will be fully offset by using a portion of the President’s proposed Financial Crisis Responsibility Fee, which imposes a fee on the largest financial institutions based on their size and the riskiness of their activities – ensuring that the program does not add a dime to the deficit.• Fully Streamlining Refinancing for All GSE Borrowers: The Administration has worked with the FHFA to streamline the GSEs’ refinancing program for all responsible, current GSE borrowers. The FHFA has made important progress to-date, including eliminating the restriction on allowing deeply underwater borrowers to access refinancing, lowering fees associated with refinancing, and making it easier to access refinancing with lower closing costs.To build on this progress, the Administration is calling on Congress to enact additional changes that will benefit homeowners and save taxpayers money by reducing the number of defaults on GSE loans. We believe these steps are within the existing authority of the FHFA. However, to date, the GSEs have not acted, so the Administration is calling on Congress to do what is in the taxpayer’s interest, by:a. Eliminating appraisal costs for all borrowers: Borrowers who happen to live in communities without a significant number of recent home sales often have to get a manual appraisal to determine whether they are eligible for refinancing into a GSE guaranteed loan, even under the HARP program. Under the Administration’s proposal, the GSEs would be directed to use mark-to-market accounting or other alternatives to manual appraisals for any loans for which the loan-to-value cannot be determined with the GSE’s Automated Valuation Model. This will eliminate a significant barrier that will reduce cost and time for borrowers and lenders alike.b. Increasing competition so borrowers get the best possible deal: Today, lenders looking to compete with the current servicer of a borrower’s loan for that borrower’s refinancing business continue to face barriers to participating in HARP. This lack of competition means higher prices and less favorable terms for the borrower. The President’s legislative plan would direct the GSEs to require the same streamlined underwriting for new servicers as they do for current servicers, leveling the playing field and unlocking competition between banks for borrowers’ business.c. Extending streamlined refinancing for all GSE borrowers: The President’s plan would extend these steps to streamline refinancing for homeowners to all GSE borrowers. Those who have significant equity in their home – and thus present less credit risk – should benefit fully from all streamlining, including lower fees and fewer barriers. This will allow more borrowers to take advantage of a program that provides streamlined, low-cost access to today’s low interest rates – and make it easier and more automatic for servicers to market and promote this program for all GSE borrowers.• Giving Borrowers the Chance to Rebuild Equity in their Homes Through Refinancing: All underwater borrowers who decide to participate in either HARP or the refinancing program through the FHA outlined above will have a choice: they can take the benefit of the reduced interest rate in the form of lower monthly payments, or they can apply that savings to rebuilding equity in their homes. The latter course, when combined with a shorter loan term of 20 years, will give the majority of underwater borrowers the chance to get back above water within five years, or less.To encourage borrowers to make the decision to rebuild equity in their homes, we are proposing that the legislation provide for the GSEs and FHA to cover the closing costs of borrowers who chose this option – a benefit averaging about $3,000 per homeowner. To be eligible, a participant in either program must agree to refinance into a loan with a no more than 20 year term with monthly payments roughly equal to those they make under their current loan. For those who agree to these terms, the lender will receive payment for all closing costs directly from the GSEs or the FHA, depending on the entity involved.EXAMPLE: How Rebuilding Equity Can Benefit a Borrower A borrower has a 6.5 percent $214,000 30-year mortgage originated in 2006. It now has an outstanding balance of $200,000, but the house is worth $160,000 (a loan-to-value ratio of 125). The monthly payment on this mortgage is $1,350. While this borrower is responsibly paying her monthly mortgage, she is locked out of refinancing. By refinancing into a 4.25 percent 30-year mortgage loan, this borrower will reduce her monthly payment by $370. However, after five years her mortgage balance will remain at $182,000. Under the rebuilding equity program, the borrower would refinance into a 20-year mortgage at 3.75 percent and commit her monthly savings to paying down principal. After five years, her mortgage balance would decline to $152,000, bringing the borrower above water. If the borrower took this option, the GSEs or FHA would also cover her closing costs – potentially saving her about $3,000.• Streamlined Refinancing for Rural America: The Agriculture Department, which supports mortgage financing for thousands of rural families a year, is taking steps to further streamline its USDA-to-USDA refinancing program. This program is designed to provide those who currently have loans insured by the Department of Agriculture with a low-cost, streamlined process for refinancing into today’s low rates. The Administration is announcing that the Agriculture Department will further streamline this program by eliminating the requirement for a new appraisal, a new credit report and other documentation normally required in a refinancing. To be eligible, a borrower need only demonstrate that he or she has been current on their loan.• Streamlined Refinancing for FHA Borrowers: Like the Agriculture Department, the Federal Housing Authority is taking steps to make it easier for borrowers with loans insured by their agency to obtain access to low-cost, streamlined refinancing. The current FHA-to-FHA streamlined refinance program allows FHA borrowers who are current on their mortgage to refinance into a new FHA-insured loan at today’s lower interest rates without requiring a full re-underwrite of the loan, thereby providing a simple way for borrowers to reduce their mortgage payments.However, some borrowers who would be eligible for low-cost refinancing through this program are being denied by lenders reticent to make loans that may compromise their status as FHA-approved lenders. To resolve this issue, the FHA is removing these loans from their “Compare Ratio”, the process by which the performance of these lenders is reviewed. This will open the program up to many more families with FHA-insured loans.2. Homeowner Bill of RightsThe Administration believes that the mortgage servicing system is badly broken and would benefit from a single set of strong federal standards As we have learned over the past few years, the nation is not well served by the inconsistent patchwork of standards in place today, which fails to provide the needed support for both homeowners and investors. The Administration believes that there should be one set of rules that borrowers and lenders alike can follow. A fair set of rules will allow lenders to be transparent about options and allow borrowers to meet their responsibilities to understand the terms of their commitments.The Administration will therefore work closely with regulators, Congress and stakeholders to create a more robust and comprehensive set of rules that better serves borrowers, investors, and the overall housing market. These rules will be driven by the following set of core principles:• Simple, Easy to Understand Mortgage Forms: Every prospective homeowner should have access to clear, straightforward forms that help inform rather than confuse them when making what is for most families their most consequential financial purchase. To help fulfill this objective, the Consumer Financial Protection Bureau (CFPB) is in the process of developing a simple mortgage disclosure form to be used in all home loans, replacing overlapping and complex forms that include hidden clauses and opaque terms that families cannot understand.• No Hidden Fees and Penalties: Servicers must disclose to homeowners all known fees and penalties in a timely manner and in understandable language, with any changes disclosed before they go into effect.• No Conflicts of Interest: Servicers and investors must implement standards that minimize conflicts of interest and facilitate coordination and communication, including those between multiple investors and junior lien holders, such that loss mitigation efforts are not hindered for borrowers.• Assistance For At-Risk Homeowners:o Early Intervention: Servicers must make reasonable efforts to contact every homeowner who has either demonstrated hardship or fallen delinquent and provide them with a comprehensive set of options to help them avoid foreclosure. Every such homeowner must be given a reasonable time to apply for a modification.o Continuity of Contact: Servicers must provide all homeowners who have requested assistance or fallen delinquent on their mortgage with access to a customer service employee with 1) a complete record of previous communications with that homeowner; 2) access to all documentation and payments submitted by the homeowner; and 3) access to personnel with decision-making authority on loss mitigation options.o Time and Options to Avoid Foreclosure: Servicers must not initiate a foreclosure action unless they are unable to establish contact with the homeowner after reasonable efforts, or the homeowner has shown a clear inability or lack of interest in pursuing alternatives to foreclosure. Any foreclosure action already under way must stop prior to sale once the servicer has received the required documentation and cannot be restarted unless and until the homeowner fails to complete an application for a modification within a reasonable period, their application for a modification has been denied or the homeowner fails to comply with the terms of the modification received.• Safeguards Against Inappropriate Foreclosureo Right of Appeal: Servicers must explain to all homeowners any decision to take action based on a failure by the homeowner to meet their payment obligations and provide a reasonable opportunity to appeal that decision in a formal review process.o Certification of Proper Process: Prior to a foreclosure sale, servicers must certify in writing to the foreclosure attorney or trustee that appropriate loss mitigation alternatives have been considered and that proceeding to foreclosure sale is consistent with applicable law. A copy of this certification must be provided to the borrower.The agencies of the executive branch with oversight or other authority over servicing practices –the FHA, the USDA, the VA, and Treasury, through the HAMP program – will each take the steps needed in the coming months to implement rules for their programs that are consistent with these standards.3. Announcement of Initial Pilot Sale in Initiative to Transition Real Estate Owned (REO) Property to Rental Housing to Stabilize Neighborhoods and Improve Housing PricesWhen there are vacant and foreclosed homes in neighborhoods, it undermines home prices and stalls the housing recovery. As part of the Administration’s effort to help lay the foundation for a stronger housing recovery, the Department of Treasury and HUD have been working with the FHFA on a strategy to transition REO properties into rental housing. Repurposing foreclosed and vacant homes will reduce the inventory of unsold homes, help stabilize housing prices, support neighborhoods, and provide sustainable rental housing for American families.Today, the FHFA is announcing the first major pilot sale of foreclosed properties into rental housing. This marks the first of a series of steps that the FHFA and the Administration will take to develop a smart national program to help manage REO properties, easing the pressure of these distressed properties on communities and the housing market.4. Moving the Market to Provide a Full Year of Forbearance for Borrowers Looking for WorkLast summer, the Administration announced that it was extending the minimum forbearance period that unemployed borrowers in FHA and HAMP would receive on their mortgages to a full year, up from four months in FHA and three months in HAMP. This forbearance period allows borrowers to stay in their homes while they look for jobs, which gives these families a better chance of avoiding default and helps the housing market by reducing the number of foreclosures. Extending this period makes good economic sense as the time it takes the average unemployed American to find work has grown through the course of the housing crisis: nearly 60 percent of unemployed Americans are now out of work for more than four months.These extensions went into effect for HAMP and the FHA in October. Today the Administration is announcing that the market has followed our lead, finally giving millions of families the time needed to find work before going into default.• 12-Month Forbearance for Mortgages Owned by the GSEs: Fannie Mae and Freddie Mac have both announced that lenders servicing their loans can provide up to a year of forbearance for unemployed borrowers, up from 3 months. Between them, Fannie and Freddie cover nearly half of the market, so this alone will extend the relief available for a considerable portion of the nation’s unemployed homeowners.• Move by Major Servicers to Use 12-Month Forbearance as Default Approach: Key servicers have also followed the Administration’s lead in extending forbearance for the unemployed to a year. Wells Fargo and Bank of America, two of the nation’s largest lenders, have begun to offer this longer period to customers whose loans they hold on their own books, recognizing that it is not just helpful for these struggling families, but it makes good economic sense for their lenders as well.• A New Industry Norm: With these steps, the industry is gradually moving to a norm of providing 12 months of forbearance for those looking for work. This is a significant shift worthy of note, as only a few months ago unemployed borrowers simply were not being given a fighting chance to find work before being faced with the added burden of a monthly mortgage payment.5. Joint Investigation into Mortgage Origination and Servicing AbusesThe Department of Justice, the Department of Housing and Urban Development, the Securities and Exchange Commission and state Attorneys General have formed a Residential Mortgage-Backed Securities Working Group under President Obama’s Financial Fraud Enforcement Task Force that will be responsible for investigating misconduct contributing to the financial crisis through the pooling and sale of residential mortgage-backed securities. The Department of Justice has announced that this working group will consist of at least 55 DOJ attorneys, analysts, agents and investigators from around the country, joining existing state and federal resources investigating similar misconduct under those authorities.The working group will be co-chaired by senior officials at the Department of Justice and SEC, including Lanny Breuer, Assistant Attorney General, Criminal Division, DOJ; Robert Khuzami, Director of Enforcement, SEC; John Walsh, U.S. Attorney, District of Colorado; and Tony West, Assistant Attorney General, Civil Division, DOJ. The working group will also be co-chaired by New York Attorney General Schneiderman, who will lead the effort from the state level. Other state Attorneys General have been and will be joining this effort.6. Putting People Back to Work Rehabilitating Homes, Businesses and Communities Through Project RebuildConsistent with a proposal he first put forward in the American Jobs Act, the President will propose in his Budget to invest $15 billion in a national effort to put construction workers on the job rehabilitating and refurbishing hundreds of thousands of vacant and foreclosed homes and businesses. Building on proven approaches to stabilizing neighborhoods with high concentrations of foreclosures – including those piloted through the Neighborhood Stabilization Program – Project Rebuild will bring in expertise and capital from the private sector, focus on commercial and residential property improvements, and expand innovative property solutions like land banks.In addition, the Budget will provide $1 billion in mandatory funding in 2013 for the Housing Trust Fund to finance the development, rehabilitation and preservation of affordable housing for extremely low income families. These approaches will not only create construction jobs but will help reduce blight and crime and stabilize housing prices in areas hardest hit by the housing crisis.7. Expanding HAMP Eligibility to Reduce Additional Foreclosures and Help Stabilize NeighborhoodsTo date, the Home Affordable Mortgage Program (HAMP) has helped more than 900,000 families permanently modify their loans, providing them with savings of about $500 a month on average. Combined with measures taken by the FHA and private sector modifications, public and private efforts have helped more than 4.6 million Americans get mortgage aid to prevent avoidable foreclosures. Along with extending the HAMP program by one year to December 31, 2013, the Administration is expanding the eligibility for the program so that it reaches a broader pool of distressed borrowers. Additional borrowers will now have an opportunity to receive modification assistance that provides the same homeowner protections and clear rules for servicers established by HAMP. This includes:• Ensuring that Borrowers Struggling to Make Ends Meet Because of Debt Beyond Their Mortgage Can Participate in the Program: To date, if a borrower’s first-lien mortgage debt-to-income ratio is below 31% they are ineligible for a HAMP modification. Yet many homeowners who have an affordable first mortgage payment – below that 31% threshold – still struggle beneath the weight of other debt such as second liens and medical bills. Therefore, we are expanding the program to those who struggle with this secondary debt by offering an alternative evaluation opportunity with more flexible debt-to-income criteria.• Preventing Additional Foreclosures to Support Renters and Stabilize Communities: We will also expand eligibility to include properties that are currently occupied by a tenant or which the borrower intends to rent. This will provide critical relief to both renters and those who rent their homes, while further stabilizing communities from the blight of vacant and foreclosed properties. Single-family homes are an important source of affordable rental housing, and foreclosure of non-owner occupied homes has disproportionate negative effects on low-and moderate-income renters.8. Increasing Incentives for Modifications that Help Borrowers Rebuild EquityCurrently, HAMP includes an option for servicers to provide homeowners with a modification that includes a write-down of the borrower’s principal balance when a borrower owes significantly more on their mortgage than their home is worth. These principal reduction modifications help both reduce a borrower’s monthly payment and rebuild equity in their homes. While not appropriate in all circumstances, principal reduction modifications are an important tool in the overall effort to help homeowners achieve affordable and sustainable mortgages. To further encourage investors to consider or expand use of principal reduction modifications, the Administration will:o Triple the Incentives Provided to Encourage the Reduction of Principal for Underwater Borrowers: To date, the owner of a loan that qualifies for HAMP receives between 6 and 21 cents on the dollar to write down principal on that loan, depending on the degree of change in the loan-to-value ratio. To increase the amount of principal that is written down, Treasury will triple those incentives, paying from 18 to 63 cents on the dollar.o Offer Principal Reduction Incentives for Loans Insured or Owned by the GSEs: HAMP borrowers who have loans owned or guaranteed by Fannie Mae or Freddie Mac do not currently benefit from principal reduction loan modifications. To encourage the GSEs to offer this assistance to its underwater borrowers, Treasury has notified the GSE’s regulator, FHFA, that it will pay principal reduction incentives to Fannie Mae or Freddie Mac if they allow servicers to forgive principal in conjunction with a HAMP modification.