Reed Reintroduces the Preserving Homes & Communities Act

WASHINGTON, DC - In an effort to protect homeowners from foreclosure and keep homes in the hands of families and local civic institutions, U.S. Senators Jack Reed (D-RI), Tina Smith (D-MN), Ron Wyden (D-OR), Jeff Merkley (D-OR), and Chuck Schumer (D-NY) today reintroduced the Preserving Homes and Communities Act (S. 3753).

This legislation would strengthen the residential mortgage market by reforming Federal Housing Administration (FHA), Fannie Mae, and Freddie Mac note sale programs to better protect homeowners and local communities. Rather than having nonperforming and reperforming loans sold at a discount to private equity firms and institutional investors, the bill would protect homeowners by requiring FHA, Fannie Mae, and Freddie Mac to give local entities with public missions, including states, municipalities, and nonprofits, the first opportunity to purchase nonperforming and reperforming mortgages, while boosting loss mitigation protections for every homeowner whose mortgage is subject to a note sale.

In the wake of the Great Recession, the Federal Housing Administration and government sponsored enterprises (GSEs) - Fannie Mae and Freddie Mac, which have a public mission that includes supporting and expanding homeownership - began selling nonperforming loans, and in the GSEs' case, nonperforming and reperforming loans. These transactions, known as "note sales," transfer ownership of mortgages predominately to the control of private equity firms and institutional investors. While note sales enrich investors and help FHA, Fannie, and Freddie marginally reduce risk, they do not help struggling Americans remain in their homes - the majority of homeowners with nonperforming mortgages included in FHA, Fannie, and Freddie note sales end up losing their home.

When borrowers with loans insured by FHA or securitized by Fannie Mae or Freddie Mac become delinquent on mortgages, they have certain protections against foreclosure because their servicers must offer specific federally-required loss mitigation options before foreclosure proceedings can begin. These protections help many borrowers catch-up on their payments. However, these protections are dramatically scaled back when a mortgage is included in a note sale. In fact, recent data shows that the majority of homeowners whose mortgages are the subject of a nonperforming loan sale by the GSEs wind up losing their homes after servicers reach a final resolution. In the case of FHA reverse mortgage note sales, a staggering 90 percent of homeowners ultimately lost their homes. Moreover, according to Government Accountability Office (GAO) findings, nonperforming loans sold by FHA are more likely to face foreclosure than comparable loans that FHA kept on its balance sheet.

The Trump White House last month announced it is "taking steps" to ban large institutional investors from buying single-family homes and issued an executive order directing multiple federal agencies to limit federal support for such purchases. While those are positive sounding words, Congress must act to prevent institutional investors from taking advantage of struggling Americans to foreclose on homes and juice their profits. Reforming FHA and GSE note sales and putting in place real safeguards would protect borrowers and keep more homes in the hands of local communities.

"Housing costs are higher than ever before and we need to make it easier for working families to keep a roof over their heads. The national data clearly shows that the current note sales system is not working properly and is prioritizing the wants of investors over the needs of homeowners. If a widow falls behind on her mortgage because her spouse passed away and her mortgage is sold to a third-party, her ability to access strong loss mitigation procedures and stay in her home should not decrease simply because ownership of her mortgage changed hands. The note sale process must prioritize minimizing foreclosures and protecting homeowners, not creating profit for big corporations," said Senator Reed. "The Preserving Homes and Communities Act will implement key reforms to strengthen foreclosure protections and better protect homeowners and communities."

The Preserving Homes and Communities Act would ensure that borrowers receive at least a 90-day notice before their mortgage is involved in a note sale.

The bill would also ensure that all applicable FHA or GSE-required loss mitigation options have been exhausted before a transaction occurs. And if a note sale does occur, the purchaser would be required to offer homeowners loss mitigation options on terms that at least match those available to them before the transaction.

The Preserving Homes and Communities Act further prioritizes local control of properties by requiring FHA, Fannie Mae, and Freddie Mac to give first crack at note sale purchases to state and local governments as well as local nonprofit organizations.

Additionally, the legislation would require nonperforming loan purchasers to offer at least 75 percent of foreclosed properties to owner-occupants at fair market value, to nonprofits or local governments, or to renters with income at or below 100 percent area median income.

The Preserving Homes and Communities Act is supported by the National Consumer Law Center (on behalf of its low-income clients) and the National Community Stabilization Trust.

"The Preserving Homes and Communities Act provides important first steps to ensure homeowners are aware of what is happening with their loans," said Steve Sharpe, Senior Attorney at the National Consumer Law Center. "This Act will require home loans to be reviewed for sustainable loss mitigation options to prevent unnecessary foreclosures."

"NCST supports the Preserving Homes and Communities Act as a way to preserve and expand homeownership," said Sarah Edelman, Executive Vice President of NCST (National Community Stabilization Trust). "For more than 15 years, NCST has worked in the housing aftermarket to ensure distressed assets are transferred to mission-based organizations committed to increasing affordable homeownership. Nonprofit housing providers are essential to preserving and sustaining communities across the country. The Preserving Homes and Communities Act would allow nonprofit entities to better compete with investors when single family assets are sold by the federal government, ensuring more of these homes are fixed up and sold affordably to aspiring homeowners and strengthening neighborhoods."

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