Less Hope for Homeowners

When Congress passed the mortgage rescue bill in July, politicians touted help for homeowners as a big part of the legislation. By Oct. 1, the Federal Housing Admin. was to set up a program that would back, with $300 billion in guarantees, the refinanced loans of homeowners in trouble. Lenders who wanted to participate would take a 10 percent loss on the loan in return for the government guarantee.

Hopes were high for the program as one possible solution to the economic crisis. It was supposed to be a way to slow down the increasing pace of foreclosures.

As Housing Wire reports, some data is now available on the program’s progress so far. It would be fair to say that a celebration hardly is in order.

In its first two weeks, 42 applications were filed for the program. Not a single one was accepted. The problem seems to be with third-party investors in mortgage-backed securities, who won’t take any losses on their investments. From Housing Wire:

The problem, however, may not be lenders, who say they’re more than willing to begin processing the loans. Instead, the problem sits with third-party investors that have thus far proven unwilling to take the minimum 10 percent haircut required to put borrowers into the program, plus an upfront premium payment–losses are actually far greater for investors who participate, given that the 10 percent figure is based on a current appraisal, and not original LTV.

John Sorgenfrei, president of Florida-based Assurance Home Loan, Inc., said he receives calls from eight to 10 borrowers daily about participation in the program. For the time being, he has been forced to make them wait, as no investors so far have bought into the program.

“I wish I could say we have something in the works,” he said. “We’re waiting for the investors to decide whether it’s going to be a third-party participation or just exclusively held for the lenders.”

Robert Paduano, managing director at Allegro Funding Corp., licensed to operate in 24 states and signed up on the H4H list, also said in an interview that the hold-up on the program has resulted from investors unwilling to accept rewrites on existing loans.

“The [H4H] program is a joke,” he said. “It’s not going to materialize into what we had hoped for because most lenders are unable or unwilling to write down the principal balance to 90 percent because their investors won’t let them.”

There’s a growing list of banks trying to do loan modifications, with JPMorgan, Bank of America, and IndyMac among them. And there’s the program being put together by the Treasury Dept. and the Federal Deposit Insurance Corp. All of them rely on the voluntary participation of lenders and investors, and depend on their willingness to take a losses in return for government guarantees.

Judging by the early returns of the FHA program, and the difficulty in getting other loan modifications through, it’s clear that investors are in the driver’s seat — and that they’re not willing to take any hits.

In the middle of a budget battle in the early 1990s, James Carville, President Bill Clinton’s political adviser, once remarked that he hoped to come back in the next life as the bond market, because it was all-powerful. These days the choice might be investors in toxic mortgage-backed securities, unwilling to give up their double-digit returns — and, apparently, far enough removed from the fluttering of bank-owned signs on millions of empty houses where people once tried to carve out a life, to even care.