Interview with Senator Robert Menendez

In February, on the heels of $25 billion attorneys general mortgage settlement, Sen. Robert Menendez unleashed the Preserving American Homeownership Act, a bill that would help eligible underwater homeowners by creating a program where banks reduce mortgage principal in exchange for a portion of the increased value of the home over time -- shared appreciation mortgage.The bill was timely because it mirrored Ocwen Financial's loan modification program, Shared Appreciation Modification, that creates equity by writing down an underwater borrower’s principal balance to 95 percent LTV. In this interview, Shelterforce talks to Menendez, (D-NJ), who serves as chairman of the Senate Banking Committee's subcommittee on Housing, Transportation, and Community Development, about this initiative, the ongoing federal response to the housing crisis, the Sustainable Communities Initiative, the Occupy movement, and more.

Shelterforce: You have long been a supporter of the idea that the GSEs should conduct principal reduction for underwater and at-risk homeowners to keep more people in their home and actually reduce the loss to the taxpayer. But as you know, of course, FHFA has been really resistant to that, and that’s been coming to the fore lately, and it’s gotten sort of political. How do you see a path forward toward moving principal reduction along in the current environment?

Sen. Robert Menendez: I think we need to keep the heat on to make that happen and one of the things that we have to deal with is the regulatory process, how banks get treated if they do the principal reductions that we want them to do, and how the reduction takes place.

I also introduced a bill in February to make shared appreciation mortgages more globally available. This is where the loan is written down to 95 percent of loan to ratio value and where, in return, the lender, for reducing that amount of the original loan, will get a percentage of any increase in appreciation. So it incentivizes them to write down the loan now when people desperately need it and take the risk. There might be appreciation, there might not be appreciation. But if there is, they’re going to get part of it in return for the principal amount that they reduced.

So I think we need to do a series of things, both on the regulatory side, on the incentive side, and to continue to push. We’re also waiting to see how the attorney’s general settlement with the country’s largest mortgage servicers plays out because lot of that money will go to principal reduction. While there are many people who believe that the settlement was insufficient, we look forward to seeing a scenario where that money could be used for loan reduction.

We recently did an interview with the CEO of Ocwen, and they’re carrying out a shared appreciation mortgage program that’s similar to yours. Do you see the fact that a private vendor is engaging in this as something that might help make the GSEs more comfortable with it?

I think so. Ocwen was actually the genesis of some of this idea. Of course, they’re doing it in the private sector within a limited universe. I want to dramatically expand that universe.

It seems to me that the GSEs would look at it and be able to say, “Well, we still have an opportunity to recuperate a significant amount of principal” at the end of the day by having a percentage of future appreciation recaptured, and therefore strengthen their portfolio.

My argument to the GSEs and the conservator, who I think has had a very narrow view of conservatorship, is that when a house forecloses, how much don’t you lose. And if you’re going to take that write-down, then why not take a write-down that, at the end of the day, keeps families in their homes?

Exactly. You mentioned potential regulatory help in terms of the principal write-down. Do you have specific ideas in mind of things that would help move that forward?

Part of the challenge for the banks is that, if they write down significantly large parts of their portfolio in the mortgage market, their rating with the regulators is affected. And so it’s almost like “Let me keep the property on the books because for so long as I keep the property on the books, I can have it at the value that I lent at or it was appraised at.”

First of all, that’s unrealistic because, obviously, values have changed. Second, it’s unrealistic for the regulators to insist that they recapitalize to the extent that they go ahead and make principal reductions, when, in fact, we all know that those would be write-downs anyhow. So finding the right balance as to how do we allow the principal reductions to take place, but not penalize the banks for doing so is the access that I’m trying to find, that intersection that accomplishes both of those goals.

It seems to me that it’ll have to have some regulatory review that says that a certain percent of overall write-down does not trigger a recapitalization, because otherwise the bank not only wouldn’t take its losses, but that it would also have to seek new capital just to be in the present status position they’re in. That’s not exactly an incentive for them.

Do you think the special mortgage investigation unit headed up by New York State AG Eric Schneiderman could quell some of the concerns that the AG settlement didn’t go far enough? In what way would you like to see it have an impact?

The president’s effort is to ensure that those who violated the existing law get prosecuted and I think this would send a clear message to the marketplace.

Shouldn’t this have happened sooner?

Should it have been done earlier? Yes. I mean, I certainly would have liked to have seen it done earlier. I think the administration was totally consumed with dealing with the consequences of what happened more so than the causes in the first instance, but I’m glad that the president ultimately got to it.

Will this tie in in any way with the OCC’s foreclosure review program that you’ve supported recently?

I really don’t know for sure, but I think this unit has a lot more to do with the securitization aspect of what transpired and some of the mortgage products that transpired, but I’m not sure how far it goes beyond that or how it’s going to interface.

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