Hope for Homeowners flops
The federal government's latest, heavily hyped foreclosure prevention program was supposed to save 400,000 homes from foreclosure by helping borrowers refinance adjustable-rate mortgages they can't afford.
That didn't happen. By early February the Federal Housing Administration had fielded 66,000 calls about the program, but only 451 applications had been received and 25 loans approved.
The Bush administration revised the rules in an effort to save the program, and now the Obama administration is considering whether there's any way to salvage Hope for Homeowners.
The problem is that none of the major mortgage lenders, including Bank of America, Citigroup and Wells Fargo, are taking part.
They've been unwilling to accept the substantial losses the government requires to close out existing loans or to make the new mortgages required to refinance those distressed properties.
"There is no effort on the part of many lenders to participate," says Walter Walker Jr., a HUD counselor and co-author of Foreclosure: The American Nightmare. "They have not embraced the program, and if it's being offered by anyone, they're certainly being quiet about it."
Hope for Homeowners is proving to be as big a debacle as the government's other attempts to help homeowners avoid foreclosure, such as 2007's highly publicized interest rate freeze and FHASecure, which was shut down Jan. 1.
Hope for Homeowners was supposed to be more helpful, because it offers new, more affordable mortgages to the most desperate borrowers -- those who are behind on their payments and owe more than their homes are worth.
But lawmakers made some faulty assumptions about how cooperative lenders would be.
Let's say you borrowed the entire purchase price of a $200,000 house a couple of years ago. You still owe $198,000, but property values in your area have declined and your home now is worth $170,000.
That makes it nearly impossible to swing a traditional refinancing, because your collateral (the house) isn't worth as much as you need to borrow to pay off the original loan.
Hope for Homeowners gets around that by having the Federal Housing Administration guarantee the repayment of a new loan. But that comes with a big caveat: If your monthly payments are high, you can't borrow more than 90% of what your home is currently worth.
In our example, the homeowner can borrow just $153,000.
That means the original lender must accept $153,000 as full payment on a $198,000 debt -- a 23% loss -- or haircut, as it's often called in the lending industry.
If the lender doesn't accept the loss, the homeowner can't take advantage of the Hope program and will continue down the road to foreclosure.
The silver lining, if you can find one in this terrible mess, is that some lenders are taking cues from the Hope program if not adopting it outright.
Bank of America, JPMorgan Chase & Co. and IndyMac Federal Bank have all started significant programs to modify unaffordable mortgages.
"We're seeing some strong reductions in interest rates as part of modifications," Walker says. Sometimes the reductions are for a long period of time. Sometimes they're for only a few years.
Throughout the mortgage crisis, government leaders such as Federal Reserve Chairman Ben Bernanke, U.S. Sen. Chris Dodd (D-Conn.), and U.S. Rep. Barney Frank (D-Mass.), have urged lenders to accept similar losses by forgiving some of the debt on those high-cost ARMs borrowers can no longer afford.
Writing off some of the principal on a loan is one of two ways to substantially lower monthly payments and help homeowners avoid foreclosure. (The other option is to reduce the interest rate.)
But right now, the big hedge funds, banks and mortgage companies that own much of the most troubled mortgage debt have been uniformly, and unrelentingly, unwilling to do so.
When Hope for Homeowners was approved in July 2008, we raised that problem with Steven Adamske, a spokesman for Frank, who chairs the House Financial Services Committee.
"We have gotten some positive feedback from some of the (lending) institutions," Adamske told us, but he acknowledged, "No one's acting like it's the greatest thing since peanut butter."
But it was clear that Hope for Homeowners was going to disappoint when executives from the major mortgage-servicing companies told Frank's committee in the fall of 2008 that they were usually unwilling to write down debt.
Alan White, an assistant professor of law at Valparaiso University in Indiana, backed that up with research showing fewer than 2% of mortgage modifications over the past year reduced the borrower's principal.
As a result, borrowers who are upside-down on their loans will remain stuck in their deceptive and costly option ARMs and 2/28 and 3/27 mortgages.
The Bush administration tried to save the program by relaxing some of the rules late in 2008, allowing lenders to reduce a borrower's mortgage principal to 96.5% of a home's current value instead of 90%. In theory, that means banks and investors would lose less money, making them more willing to participate.
But that only applies to homeowners whose post-workout payments would be 31% or less of their income. If payments are eating up a bigger portion of a borrower's income, lenders will still have to reduce the principal to 90% of the home's value.