Is Hope for Homeowners Hopeless?

By
Friday, February 13, 2009 at 6:00 am

It seemed like a good idea at the time. Last October, the Bush administration unveiled a plan aimed at helping homeowners facing foreclosure called Hope For Homeowners. Earlier this month, there was consternation and disbelief across the political and economic spectrum when it was revealed that the program — initially projected to help up to 400,000 of the most distressed borrowers — had closed exactly 25 loans since its inception.

The logic behind Hope For Homeowners sounded simple enough. It was inspired by a Depression-era entity, the Home Owners’ Loan Corporation, that helped more than a million Americans stay in their homes. Homeowners stuck with ballooning mortgage payments and declining home values could apply for a new, fixed-rate mortgage backed by the Federal Housing Administration. The Department of Housing and Urban Development allocated $29.5 million in start-up costs to cover training and development for the program. To date, a little more than half that amount has actually been spent. What happened?

Illustration by: Matt Mahurin

Illustration by: Matt Mahurin

“Basically, the incentives are wrong for every category of participant,” said Julia Gordon, senior policy counsel at the non-profit Center for Responsible Lending. For starters, it wasn’t cheap to participate. Homeowners had to pay hefty fees and insurance premiums. In addition, a provision designed to discourage house-flipping required homeowners to share, on a sliding scale, between 50 and 100 percent of appreciated equity built up in the home for the first five years. After five years, homeowners would have to turn over 50 percent of that equity, no matter how far into the future they kept the house.

For their part, lenders were required to lower the principle, referred to as “taking a haircut” in industry jargon. Many of these at- or near-default mortgages also had junior liens on them, often in the form of home equity loans. Hope For Homeowners would wipe out those lienholders entirely. Since the plan was wholly voluntary, lenders were under no obligation to take a loss on the loan. As a result, the vast majority took a wait-and-see approach.

The biggest stumbling block, though, was that of securitization. The majority of subprime mortgages were packaged into securities, and the agencies that manage those securities were loathe to enact loan modifications that could lead to lawsuits against them. Technically, a servicing company is free to do what it needs to do to protect investor dollars. However, if the servicer thought taking the HFH “haircut” was the better option while the investor wanted to foreclose and hope for the best, a messy legal battle could ensue, and no one wanted to be the test case.

“What seems to be happening is the servicers are saying ‘I know foreclosure is bad for everybody but my agreement permits it,’ so it’s the default option,” said Alan Mallach, nonresident senior fellow at the Brookings Institution.

Housing policy experts say the program probably wasn’t helped by the decision to put it under the umbrella of the Federal Housing Authority. “The FHA definitely does not move quickly,” said Sharon Price, director of policy for the housing advocacy group National Housing Conference. Marrying HFH to existing FHA programs turned out to be much more complicated than planned, to the extent that the agency ended up having to build the initiative’s infrastructure nearly from scratch.

“What happened was once we got to the details, this program was so different it really forced the FHA folks — who were pretty thinly staffed — to create a whole new infrastructure,” said the Center for Responsible Lending’s Gordon. “It wasn’t as efficient as one might have theoretically surmised.” This alone would have slowed down implementation, but the directive couldn’t have come at a worse time for the FHA.

When the subprime sector took off earlier this decade, the FHA had found itself increasingly on the margins. Formerly the go-to lender for borrowers with tarnished credit histories, the agency found itself competing against behemoths like Countrywide and IndyMac. Its limited menu of fixed-rate loans seemed less attractive to homebuyers than the exotic, interest-only, adjustable or deferred payment plans the private sector offered, and the FHA’s market share slid.

That trend reversed abruptly when the subprime mortgage market imploded. Last year, the FHA suddenly had to juggle a whopping 161.2 percent increase in applications over 2007. “If Hope For Homeowners actually took off, they’d be swamped,” said Alan Mallach.

Last week, House Financial Services Committee chair Rep. Barney Frank (D-Mass.) pledged to figure out what went wrong, and a series of tweaks to the program has been green-lighted by the financial committee and awaits full House approval. This piece of on-deck legislation dials back the required premiums and equity-sharing measures, and decreases the loss-taking required of lenders. Another provision gives legal immunity to loan servicers who modify loans.

Some say it’s not enough. American Enterprise Institute resident fellow Alex Pollock suggests taking HFH out of the FHA and creating a separate entity. “What they did in the 30s and what I would have preferred would have been a stand-alone entity.” Pollock said. “You’d have had a much more energetic program with a higher probability of success if it was set up as a thing in and of itself.”

Alan Mallach takes it a step further, suggesting that this new division could be responsible for all of the mortgage-related programs, infusions and investments the government has become involved — some would say entangled — in over the past several months. “What we need is a single mechanism for whenever the government finds itself controlling a mortgage,” he said.

Both agree that such a plan is politically unpalatable, though, because it requires at the outset an implicit acknowledgement that the current mortgage problems are going to be with us for a long time to come. Even for a government that has gobbled up substantial amounts of soured assets, that admission might be too much to swallow.

Martha C. White is a freelance journalist in New York. She regularly writes about finance and the economy.

Comments

29 Comments

house » Blog Archive » The Washington Independent » Is Hope for Homeowners Hopeless?
Pingback posted February 13, 2009 @ 7:02 am

[...] Regina Avalos wrote an interesting post today onHere’s a quick excerptLast week, House Financial Services Committee chair Rep. Barney Frank (D-Mass.) pledged to figure out what went wrong, and a series of tweaks to the program has been green-lighted by the financial committee and awaits full House … [...]


» The Washington Independent » Is Hope for Homeowners Hopeless? » Subprime Mortgage Refinance
Pingback posted February 13, 2009 @ 12:04 pm

[...] news by Martha C. White « Subprime Mortgage Rates | Subprime Lenders | Subprime Mortgage … » 25 People [...]


Government Refinance Assistance
Pingback posted February 14, 2009 @ 1:19 am

[...] documented here in the past, the recently launched H4H program was a colossal failure. There was an interesting article over at The Washington Independent that delved into why it was such a failure. There are three [...]


Nate
Comment posted March 5, 2009 @ 7:47 pm

Is there any more information on when congress will tweak the program? I'm in quite a bind with my house depreciating almost half since I purchased it 3 years ago.


jt
Comment posted March 20, 2009 @ 2:53 pm

When I looked into this program last year for my house, it was a long and costly process and I wish someone, either on my lender servicer's end and/or FHA, would have been upfront about the following:

1. Lender participation in the program was voluntary. The people at FHA acted like getting approved for a loan mod was a totally foregone conclusion because this was a government program and wrote up a loan for me and told me to go out and get my home reappraised to the tune of $450 and my lender would take care of the rest! As it turned out…

2. Nobody was participating in the program, most notably Fannie Mae, who owned my loan, so all my work (and $$) was for naught.

3. My loan servicer was utterly clueless about the whole process and I ended up having to talk to supervisor after supervisor until one finally leveled with me: your lender is not participating in the HFH program, you wasted your money on a reappraisal, and there is _no_ chance your loan will be refinanced or altered unless you're deep in foreclosure and even then we'd probably just let you hang. Good day.

Thus far, my efforts to sound out a refi with my servicer based on the NEW program, which Fannie Mae _is_ supposedly participating in, has produced the following result:

Nobody, anywhere, at Fannie Mae or my loan servicer, has any idea what's in the program, whether I qualify, how I can apply, or what the hell is going on. I'm not kidding. They literally told me that have no idea whether Fannie Mae is going to be restructuring any mortgages or not. No clue. So I'm very positive about how this will work out.


Suburban Guerrilla » Blog Archive » Bush ‘Hope for Homeowners’ Plan? Hopeless
Pingback posted March 24, 2009 @ 10:36 am

[...] GOP tradition of giving misleading names to programs, this one was a standout. BushCo didn’t do anything right, did they? It seemed like a good idea at the time. Last October, the Bush administration unveiled a [...]


Bridget Magnus » Hope, and Wishful Thinking
Pingback posted March 25, 2009 @ 3:47 pm

[...] full month ago the Hope for Homeowners plan was declared “hopeless“, pointing out that the program designed to help 400,000 homeowners by now had closed a [...]


Steven Earl Salmony
Comment posted April 15, 2009 @ 5:52 am

Dear Friends,

Perhaps you can assist me. There must be something wrong with the “picture” I am about to draw, but no one with wealth, power, status, and privileges to conspicuously consume and endlessly hoard has said anything. Their bought-and-paid-for politicians and absurdly enriched minions in the mass media are also silent.

Picture this:

A remarkably tiny group of conniving, deceitful, ostentatiously greedy, patently fraudulent financial schemers on what is left of Wall Street in the remaining investment houses and the major {stress-tested} banks that are described as “too big to fail” are at one and the same time being given hundreds of billions of dollars in taxpayer money, racking up billions of dollars in profits, and paying themselves millions of dollars in bonuses. All the while, millions of people are losing their livelihoods, homes, pensions, etc.

What is wrong with this picture?

Sincerely,

Steve


america
Comment posted April 16, 2009 @ 1:00 pm

wellcome to SOCIALISM>people just think help is coming,and it never does,because its impossible.this central government stuff has al-ready been tried,it is not new.look at any bankrupt liberal state,or any democratic ran longterm county.


Will Senate Allow Banksters To Reap More Rewards? « The Ice Blog
Pingback posted April 30, 2009 @ 12:15 pm

[...] far, all the foreclosure prevention plans that rely on voluntary participation from the banks have failed. If cramdown is removed from [...]


FHA Loans
Comment posted May 6, 2009 @ 9:19 pm

there is hope….. it is never hopeless


Power Washing Virginia
Comment posted May 11, 2009 @ 6:10 am

“Taking a haircut”?
With Federal Housing Authority it might take longer that one would expect. Now, the realization of the idea appeared to be also complicated with lots of issues involved. It doesn't sound that attractive any longer to homeowners – and to me…


Power Washing Virginia
Comment posted May 11, 2009 @ 1:10 pm

“Taking a haircut”?
With Federal Housing Authority it might take longer that one would expect. Now, the realization of the idea appeared to be also complicated with lots of issues involved. It doesn't sound that attractive any longer to homeowners – and to me…


home_equity_loans
Comment posted September 10, 2009 @ 11:05 am

I have not much time, but I've got many useful things here, love it!


louis vuitton handbags
Comment posted July 6, 2010 @ 7:55 am

Perhaps you can assist me. There must be something wrong with the “picture” I am about to draw, but no one with wealth, power, status, and privileges to conspicuously consume and endlessly hoard has said anything.


louis vuitton
Comment posted July 31, 2010 @ 9:36 am

A remarkably tiny group of conniving, deceitful, ostentatiously greedy, patently fraudulent financial schemers on what is left of Wall Street in the remaining investment houses and the major {stress-tested} banks that are described as “too big to fail” are at one and the same time being given hundreds of billions of dollars in taxpayer money, racking up billions of dollars in profits, and paying themselves millions of dollars in bonuses. All the while, millions of people are losing their livelihoods, homes, pensions, etc.


Wall Waterfall
Trackback posted August 23, 2011 @ 4:54 am

Wall Waterfall…

[...]below you’ll find the link to some sites that we think you should visit[...]…


dumbo rat
Trackback posted August 23, 2011 @ 8:44 pm

rats are good pets…

[...]below you’ll find the link to some sites that we think you should visit[...]…


Drip Irrigation Systems
Trackback posted August 25, 2011 @ 12:50 am

Drip Irrigation Systems…

Take some time to see these some might represent fascination too! wow have one hear on Middle East has now got additional troubles as well :-)…


cover rack stand
Trackback posted August 25, 2011 @ 5:19 pm

cutter sugarcraft souvenirs…

[...]we like to honor other sites on the web, even if they aren’t related to us, by linking to them. Below are some sites worth checking out[...]…


soft pouch zipper
Trackback posted August 25, 2011 @ 7:20 pm

luggage set gray…

[...]just below, are some totally unrelated sites to ours, however, they are definitely worth checking out[...]…


Red Bottom Shoes
Trackback posted August 29, 2011 @ 11:04 am

The Best Cat Suits For Women…

[...]following are a handful of hyper-links to online websites we link to since we feel they will be really worth visiting[...]…


Left Handed Scholarships
Trackback posted August 31, 2011 @ 6:10 am

Netflix…

[...]right here are some hyper-links to websites which we link to because we think they are really worth checking out[...]…


Taylor Lautner Workout
Trackback posted September 1, 2011 @ 10:30 pm

Ryan Reynolds Workout Routine…

[...It's not so often you find a site that provides such value on the internet...]…


war games online
Trackback posted September 3, 2011 @ 8:34 pm

strategy games online…

[...]I have done extensive research on this subject, and agree completely with the way this was written. I only wish I had the eloquence to put it into quality writing. Although unrelated to my blog, worth linking to.[...]…


Snoring Solutions
Trackback posted September 3, 2011 @ 10:21 pm

Fast Snoring Solutions…

[...]plenty more info with this sort of area one specific, find[...]…


ecommerce solutions
Trackback posted September 4, 2011 @ 4:34 am

Ecommerce devlopment for business…

[...]below, are some totally unrelated sites to ours, however, they are definitely worth checking out at least once[...]…


Cheap Suits For Men
Trackback posted September 7, 2011 @ 2:33 am

Miss America 2011…

[...]following are a handful of references to webpages we connect to for the fact we believe they’re worth browsing[...]…


Head and facial sweating be gone scam
Trackback posted September 7, 2011 @ 4:04 am

Improve your Physique…

[...]we would like to help promote some of the more high end blogs on our list here[...]…


RSS feed for comments on this post.

Sorry, the comment form is closed at this time.