Two former IndyMac Bank executives are lobbying federal officials in support of a bold plan to make it easier for borrowers who have gone through a foreclosure to get home loans.
The plan, dubbed the Second Chance Program, seeks to hasten a recovery in the beleaguered housing market by reducing the amount of time a foreclosed-upon borrower must wait before obtaining a new mortgage.
According to a confidential 45-page draft provided to the Business Journal, the program would speed up the credit rehabilitation process by providing credit counseling, credit rescoring and related services to otherwise responsible borrowers who were foreclosed upon because they lost their jobs, were unable to qualify for a loan modification or were defrauded by mortgage-related scams.
“We’ve already had 6 million foreclosures occur since the crisis started, and we have another 7.5 million people in trouble today,” said Ray Mathoda, chief executive of Long Beach-based short-sale specialist AssetPlan USA Inc. and co-author of the proposal. “We (should not be) locking people out that truly should be able to get back into a home.”
The program could lead to a windfall for mortgage lenders, who have been handcuffed by required waiting periods for borrowers after a foreclosure. Under current requirements, government-sponsored mortgage giants Fannie Mae and Freddie Mac will not, in most cases, buy loans made to borrowers who have gone through a foreclosure within the past five years. The Federal Housing Administration requires at least three years to pass.
But the Second Chance Program would reduce the time requirement to as little as two years, which would dramatically increase the universe of potential homebuyers.
Over the past few months, Mathoda, the former chief administrative officer at IndyMac, has been informally shopping the proposal to government officials.
The proposal, which has not been widely disseminated, could face resistance in an industry where the IndyMac name is still toxic. The proposal’s two authors both came from the disgraced Pasadena lender, which was vilified for pushing borrowers into risky mortgages and was closed in 2008 amid substantial losses on those loans.
Already, the proposal is raising eyebrows among critics who question whether it would lead to the same problems that got lenders in trouble during the housing crisis.
“Is there worry that from the lender perspective, they might go back to the way they were before? Yeah,” said Richard Green, director of the USC Lusk Center for Real Estate.
He said if the program is implemented intelligently and carefully, it could spur a quicker recovery in the housing market, but overzealous lenders could push too far.
“This is what happened the last time around,” he said. “Competition was driving the market in a really unsustainable way.”
Limited options
The idea was born last year as Mathoda and Ron Bergum, former colleagues at IndyMac, discussed the limited options facing borrowers after foreclosure.
“Ron and I literally came up with the idea on the phone one day,” Mathoda said.
Bergum, the former co-chief executive of retail lending at IndyMac, is now chief executive of Sherman Oaks-based Prospect Mortgage, one of the nation’s largest independent mortgage bankers. He did not return calls seeking comment.
Under the proposal, the program would be funded by redistributing the fees paid on distressed real estate transactions, such as short sales, under the Treasury Department’s Home Affordable Foreclosure Alternatives initiative.
Real estate agents typically earn about 6 percent of the sale price; under the proposal, participating agents would take 4.5 percent, with a half-percent going to credit counseling and the remaining 1 percent used to facilitate the program, including management, training and advertising.
It’s uncertain who would administer the program, although the Treasury Department would be a candidate. Freddie Mac and Fannie Mae could play a role.
While Mathoda said she does not expect to be involved in the administration of the program, her company could benefit indirectly from the stimulation of the mortgage market.
The authors estimated that the program would cost about $3,000 per borrower to administer, and she believes at least 1 million people could qualify for the program.
Any budget shortfalls would be handled by “government funding or other creative means,” according to the proposal.
Mathoda said she has taken the proposal to government officials, but declined to specify the parties.
There are several avenues for implementation of the program, including lobbying Congress to pass legislation. The draft proposal also would complement existing housing programs, including the Home Affordable Foreclosure Alternatives initiative.
Industry insiders said such a proposal would at least likely require approval from Fannie Mae and Freddie Mac, which back most U.S. mortgage loans. It remains to be seen, though, whether the government-sponsored enterprises would be willing to take on more risk after sustaining considerable losses and being placed into conservatorship during the financial crisis in late 2008.
Fannie Mae; Freddie Mac; the Treasury Department; and the Department of Housing and Urban Development, which oversees FHA, did not make anyone available for comment.
Mathoda acknowledges the program could be open to criticism that it could lead to a dangerous reduction in underwriting standards – creating more of the problems that started the housing bust – but she believes that can be avoided.
“We’re not recommending loosening lending standards to do bad lending. I’m not dumb enough to recommend that,” she said. “If people don’t understand the proposal, that is exactly the criticism they come up with.”
Job losses
Proponents also point out that most foreclosures today result from job losses and other factors outside borrowers’ control. According to a recent Treasury Department survey, close to 60 percent of homeowners seeking loan modifications cite as the primary cause reduced income resulting from wage reductions, decreased hours or job loss.
Dustin Hobbs, a spokesman for the California Mortgage Bankers Association, said a common misconception is that foreclosures are primarily the result of bad decisions on the part of homeowners.
“The vast majority of people who are facing foreclosure at the moment are facing it not because they necessarily got into a loan they shouldn’t have; it’s because they have lost income or lost their job altogether,” he said. “It’s definitely a positive thing if we can help those folks.”
Indeed, the proposal has garnered some support from those who believe the lending environment has tightened to the point that potentially worthy borrowers are being shut out.
“Any program that broadens the pool of potential homeowners, stimulates the market and brings homeownership to more Americans, I’m in favor of that,” said Neil Gitnick, a 24-year veteran of the mortgage industry and president of Value Home Loan Inc., a subprime and hard-money lender in Woodland Hills.
People should not be excluded from homeownership because they have a blemish on their record, Gitnick argued. Restricting lending only to the most-qualified borrowers, he said, is bad for the industry and devastating for many prospective borrowers.
“The door to homeownership,” he said, “has been literally shut on millions of Americans.”
Still, some are skeptical that borrowers in such dire straits could be truly rehabilitated in such a short period of time.
“I don’t know who’s going to come out of a foreclosure in two years with a solid income and a good down payment,” said Judy Dugan, research director for Consumer Watchdog in Santa Monica, “but God bless them if they can.”
