H.R. 6076: Home Retention and Economic Stabilization Act of 2008

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The Home Retention and Economic Stabilization Act of 2008 (H.R. 6076) would defer
foreclosure for eligible mortgage borrowers for up to 270 days. If passed, the bill would give
extra time to some borrowers and lenders to consider alternatives to foreclosure, including
traditional loss mitigation and participation in the new Federal Housing Administration (FHA)
program for refinancing troubled loans. Some policymakers believe that a moratorium on
foreclosures (more accurately, a delay in executing foreclosures) could help stabilize housing
markets and alleviate problems from the subprime financial turmoil.
The bill would allow borrowers with subprime and negative amortization mortgages to delay
foreclosure proceedings if they continued to make monthly payments established by the bill and
maintained the property. Payments during the foreclosure are based on the lesser of the original
minimum payment and a rate based on current market conditions. The bill also provides funds for
housing counseling.

This report details the Home Retention and Economic Stabilization Act of 2008 (H.R. 6076),
which would delay foreclosure for up to 270 days and set minimum payments for borrowers
during the deferment period. A foreclosure deferment may be of increased interest to
policymakers because it might allow more people to consider the new Hope for Homeowners ¹
program, passed by Congress on July 26, 2008. Hope for Homeowners is a voluntary program to
enable troubled mortgage borrowers and lenders to refinance their loans through the Federal
Housing Administration (FHA). Having created the voluntary program, it remains to be seen if
people will be willing and able to participate under current financial market conditions.
Meanwhile, the pace of foreclosures continues to rise, even as another category of loans, Alt-A,
approaches the peak of its payment resets. Some have argued for a moratorium on foreclosures to
give distressed borrowers and lenders time to seek financial relief. Others might argue that
delaying foreclosures may also delay the recapitalization of the banking system and ultimately
delay restoration of stability in financial markets. Proponents might respond that providing
additional time to keep current borrowers in their homes will ultimately reduce the magnitude of
bank losses and lessen the need for recapitalization. H.R. 6076 provides one method of granting ²
borrowers and lenders additional time to avoid foreclosure.

The Home Retention and Economic Stabilization Act of 2008 (H.R. 6076) was introduced by ³
Representative Matsui on May 15, 2008. The expressed purpose of the bill is to “permit deferrals
on certain home mortgage foreclosures for a limited period to allow homeowners to take remedial
action, to require home mortgage servicers to provide advance notice of any upcoming reset of
the mortgage interest rate, and for other purposes.” H.R. 6076 seeks to achieve these goals by
establishing a 270 day deferment period for eligible mortgages during which foreclosure
proceedings are halted, requiring borrowers to continue making loan payments during the
deferment period, and requiring lenders to provide borrowers notice of any upcoming payment
changes due to interest rate changes or other mortgage features.
In general, the deferment period for an eligible borrower starts when the borrower notifies the
lender or servicer of an intent to exercise the right to defer foreclosure and the deferment period
lasts for 270 days. (Section 2(a)). The bill provides for an earlier end of the deferment period if
(1) the borrower ceases payment for 30 days or more, (2) the lender (or servicer) and the

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borrower agree to a qualified loan modification, or (3) there is a judicial order to end the
deferment period.
Both the borrower and the mortgage must meet certain criteria for the deferment period to apply.
The bill defines an eligible deferred-foreclosure mortgage as a subprime mortgage or a negative
amortization mortgage originated prior to January 1, 2008, that has reached its deferment trigger.
In the following discussion, the section numbers refer to subsections of section 128A that would ⁴
be added to the Truth in Lending Act as described in the bill.
(1) Subprime Mortgage Eligibility (Section 2(a)(8)). In general, subprime mortgages have higher
interest rates than prime mortgages because of greater risk of default; therefore, subprime is
defined within the bill in terms of interest rates. For first-lien loans on residential mortgages, a
loan is subprime if its interest rate equals or exceeds the yield on treasuries of comparable
maturity by more than 3 percentage points or has an annual percentage rate that equals or exceeds ⁵
the most recent conventional mortgage rate by more than 175 basis points. For mortgages that
are second liens on a residential property, subprime is defined as more than 5 percentage points
above treasuries of comparable maturity or 375 basis points above the most recent conventional
mortgages.
(2) Negative Amortization Mortgage Eligibility (Section 2(a)(6)). In general, a fully amortizing
loan pays off the full principal gradually over the term of the mortgage while a negatively
amortizing mortgage allows periods in which the outstanding balance grows. H.R. 6076 defines a
negative amortization mortgage as a consumer credit transaction secured by the consumer’s
principal residence with the potential for negative amortization of the outstanding principal
balance and under which the minimum monthly payment of principal and interest required
increases after the date of origination.
(3) Borrower Eligibility (Section 2(a)(5)). The bill establishes four criteria for borrower
eligibility. The borrower must (1) have an eligible mortgage, either subprime or negative
amortization; (2) reside at the mortgaged property and intend to continue to reside there for the
duration of the deferment period; (3) have an annual income not more than twice the state median
income, adjusted for family size; and (4) respond to any reasonable inquiries from the loan’s
servicers or creditors.
(4) The Deferment Trigger (Section 2(a)(3)). The date on which the borrower becomes eligible for
deferment depends on whether the eligibility of the mortgage is based on subprime or negative

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amortization. For subprime mortgages, the deferment trigger is the earlier of (1) any interest rate
reset or (2) the date on which the consumer becomes 60 days delinquent. For negative
amortization mortgages, the deferment trigger is the date of the first increase in the minimum
monthly mortgage payment (after origination). A specific rule for any mortgages that are both
subprime and negative amortization is not separately specified.
Under the bill, borrowers would have the right to defer any initiation of a foreclosure with respect
to any eligible mortgage until the end of the deferment period, which in general is 270 days. The
deferment applies to foreclosures initiated by both judicial and non-judicial authorities. (section
b1).
(1) Enforcement (Section 2(b)(2)). A borrower may enforce the deferment period through a
defense in any foreclosure proceeding or by bringing an action in the appropriate court of
jurisdiction.
(2) Notice to Consumers of Foreclosure Actions (Section 2(c)). The creditor or loan servicer must
notify a borrower with an eligible mortgage prior to initiating foreclosure. The notification must
be through personal service. The bill delegates to the Board the authority to issue regulations for
notifications. Possible regulations include the content of notice, format of notice, and sample
notification forms. In addition to any Board issued regulations, the notice must include the
contact information of (1) the loan servicer and creditor, (2) any other parties to the foreclosure
proceeding, such as state or local officials, and (3) sources of information for obtaining
counseling from a HUD-approved counselor. Notice must be provided 30 days prior to instituting
foreclosure proceedings and at least once every 30 days until foreclosure becomes final.
(3) Exercising the Right to Foreclosure Deferment (Section (d)). Assuming there has been, or will
be, a deferment trigger for an eligible mortgage, the borrower notifies the loan representative and
can notify officials. The borrower must notify the loan servicer or other creditor representative
described in the creditor’s notice above of the intent to exercise the right. (section d1). The
borrower’s notification to the loan servicer may be through any reasonable delivery means,
including by mail. The borrower’s notice must clearly identify the address of the property and
must certify that at least one eligible borrower (with respect to the mortgage) resides at the
property and intends to continue to reside at the property until the end of the deferment period. An
official, such as a court or sheriff, that receives notice (directly from the borrower or indirectly)
may not take foreclosure action during the deferment period.
(4) Lender or Servicer Acknowledgment (Section 2(d)(3)). Once the borrower has notified the
lender or loan servicer of deferment, the borrower must receive an acknowledgment that also
includes information on required payments during the deferment period. Within 10 business days,
the borrower must receive notice of the deferment period payments and consequences of missed
payments as discussed below.
During the deferment period, the borrower must continue to make monthly mortgage payments.
The amount of the mortgage payment required during the deferment period depends on if the

mortgage is a subprime mortgage or a negative amortization mortgage. A borrower who fails to
make the required monthly payment risks terminating the deferment period.
(1) Deferment Payment Amounts (Section 2(e)(2)). For subprime loans, the required monthly
payment during the deferment period is the lesser of the minimum monthly payment of principal
and interest on the date the loan was originated or a monthly payment to be calculated based on
recent market conditions. The formula for this second monthly payment calculation (recent
conditions) is the monthly payment required for a 30-year fixed-rate loan applied to the
outstanding balance using an interest rate equal to the most recent conventional mortgage rate
plus 100 basis points. Section 2(g) defines the most recent conventional mortgage rate as the
fixed rate mortgage rate listed in the Federal Reserve’s H.15 release in the week prior to the ⁶
determination of the deferment period payment. For example, if the most recent conventional
rate reported by the Federal Reserve is 6.30%, then the rate used to calculate the monthly
payment under the current conditions approach would be 7.30%.
Many subprime loans had a two-year introductory period followed by a 28-year period at an ⁷
adjustable interest rate to fully pay off the loan (so-called 2-28s). In many cases, the introductory
period’s interest rate was lower than the contemporaneous market rate, called a teaser, so that the
effective interest rate would be likely to rise for a given borrower even if market rates were not
rising. In some cases, the two-year introductory period may also have been interest-only, in which
case the monthly payment would rise when the loan became fully amortizing even if market
interest rates fell. The bill sets the required payment during the deferment period for subprime
loans as the lesser of the original minimum payment and what a current 30-year fixed-rate
mortgage might require for the remaining balance.
For negative amortization loans, the required payment during the deferment period is the
minimum monthly mortgage payment required at the time the mortgage was originated. A
formula for any mortgages that are both subprime and negative amortization is not separately
specified.
(2) Amortization of Deferment Balances (Section 2(e)(3)). In some months (perhaps most
months), the minimum required payment during the deferment period, as specified in Section

2(e)(2), will be less than the amount due in that month under the original terms of the mortgage.

Any difference is to be amortized over the life of the loan after the termination of the deferment
period, as specified by regulations to be issued by the Board.
(3) Prohibition of Fees (Section 2(e)(4)). No late charges can be imposed during the deferment
period. No other fees or charges may be imposed during the deferment period.
In addition to establishing a foreclosure deferment period, H.R. 6076 requires lenders to notify
borrowers of any upcoming changes in their mortgage payment. (Section 2(f)). In general,
borrowers must be provided approximately 120 days’ notice of a change in their monthly

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payment, as described below. In general, the notice must disclose the new payment and interest
rate, how they are calculated, and a list of alternatives for the borrower.
Borrowers must be notified during the one-month period that ends 120 days prior to reset. For
subprime mortgages, the 120-day period is prior to the reset of any introductory interest rate or
prior to any adjustment to a variable interest rate. For negative amortization mortgages, the 120-
day period is prior to the first change in the minimum monthly payment required.
Notice of payment reset must include the formula used to determine the interest rate and ⁸
minimum monthly payment, a good faith estimate of the applicable monthly payment after reset,
and a list of alternatives for the borrower. Alternatives for the borrower include refinancing the
loan (possibly with the new mortgage rescue plan), renegotiating loan terms with the existing
lender, payment forbearance with the existing lender, pre-foreclosure sales, and third-party
payment assistance (including any assistance from the state). The advance notice must also
include contact information for HUD-approved consumer counseling agencies and the state
housing finance authority.
The bill contains some features to encourage borrowers to maintain the value of the property
during the foreclosure deferment period (Section 2(h)). In general, borrowers may not destroy,
damage, or impair the property, or allow the property to deteriorate. Consumers are made liable to
creditors for any violations.
The bill authorizes $200 million to be appropriated for housing counseling in FY2008. The funds ⁹
are provided to the Neighborhood Reinvestment Corporation, created by Congress in 1978. The
Neighborhood Reinvestment Corporation now encompasses a larger network of agencies and
community organizations through NeighborWorks America, a non-profit organization.

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