Low expectations for homeowner-help program
Posted
Oct 01 2008, 09:32 PM
by
Karen Datko
Rating:
The federal government's new $300 billion Hope for Homeowners program opened for business today with the intent of staving off foreclosure for 400,000 homeowners in trouble. But we just have to wonder how effective it will be.
Here's a clue, from an Associated Press report: "Lenders, rather than borrowers, will decide whether to participate in the program, which requires them to take a loss on the initial loan."
With those conditions, will banks be in a rush to participate? Apparently not. Housing Wire reported: "The emerging consensus among those in the servicing trenches that spoke with HW ... has been that the program will have less impact than legislators might hope."
Patrick Duffy of The Housing Chronicles Blog wrote, "Apparently lenders are saying, 'Thanks for thinking of us, but no thanks, we'll do our own workouts. Have a nice day!'"
Hope for Homeowners is part of the massive Housing and Economic Recovery Act of 2008 passed by Congress in July. The program works like this: People who are struggling to pay their mortgage can ask to refinance to a 30-year fixed-rate loan equal to no more than 90% of the property's current market value. The interest rate will be based on current market rates. The deal works only if the holder of the current mortgage agrees to accept a loss.
The Federal Housing Authority, which will guarantee the new loan, will get 5% of the new loan for its trouble. The FHA -- not the lender -- also will benefit from any appreciation in the home's value if it is sold or refinanced again at a later date.
Homeowners are eligible only if they live in the house, cannot afford the payment, and spend more than 31% of their monthly gross income on their mortgage. They must also be able to demonstrate their ability to afford the new loan. (For other eligibility requirements, click here.)
Lenders have to be willing to do the deal. They also have to be able -- not always the case with mortgages that have been packaged and sold as securities, notes Credit Slip's Adam Levitin in a Wall Street Journal column. Lenders say they'd rather reduce a mortgage's interest rate than take a loss on the principal. They see Hope for Homeowners as a program of last resort.
Meanwhile, lenders haven't been rushing to work with people who are facing the loss of their homes. Far from it. The State Foreclosure Prevention Working Group, made up of state banking officials and attorneys general, recently issued several new findings, including: "Nearly eight out of 10 seriously delinquent homeowners are not on track for any loss mitigation outcome," and "One out of five loan modifications made in the past year are currently delinquent." So much for meaningful loan modifications.
Massachusetts Attorney General Martha Coakley, who released the working group's latest report, said, "As Congress considers a $700 billion bailout package, it is our hope that wide-scale mortgage loan modifications will be a condition of any plan. A bailout that does not build in solutions to the foreclosure-driven downward value spiral will not fix the root of the problem."
