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?
“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.
E-Verify Mandate Begins Today
The Obama administration today begins implementation of a new mandate to require all federal contractors to check the legal status of their employees to confirm
EPA Administrator Addresses Concerns About Oil Spill Waste Management
At a hearing of the national oil spill commission today, Environmental Protection Agency Administrator Lisa Jackson addressed concerns about waste disposal from
EPA administrator fires back at critics in op-ed
EPA Administrator Lisa Jackson (Pic by USACEpublicaffairs, via Flickr) EPA Administrator Lisa Jackson penned a new op-ed for the Los Angeles Times , criticizing House Republicans desperately seeking to undermine the authority of the agency they have dubbed a “job killer.” Arguing that the environment affects red states and blue states alike, Jackson writes that “it is time for House Republicans to stop politicizing our air and water.” As head of the Environmental Protection Agency, Jackson has faced harsh criticism from House Republicans and GOP presidential candidates who say the agency’s regulations are an undue burden on businesses that have to cut jobs simply to comply with clean water and air rules. Presidential hopeful Michele Bachmann has pledged to end the EPA if she takes office. “Since the beginning of this year, Republicans in the House have averaged roughly a vote every day the chamber has been in session to undermine the Environmental Protection Agency and our nation’s environmental laws,” writes Jackson.
EPA administrator defends allowing Florida to write its own water pollution rules
The EPA seal (Pic via sentryjournal.com) The Environmental Protection Agency has come under fire for its decision to allow the state of Florida to write its own water pollution rules (known as “numeric nutrient criteria”). EPA Regional Administrator Gwendolyn Keyes Fleming is now firing back, writing that the Agency commends the state Department of Environmental Protection for its draft of a proposed standard. A host of environmental groups filed suit in 2008, seeking to compel the EPA to implement a strict set of water pollution standards in Florida, arguing that the state was in violation of the Clean Water Act.
EPA administrator says federal nutrient criteria is a ‘myth’
In testimony given late last week, EPA Administrator Lisa Jackson said that false accusations about her agency’s numeric nutrient criteria to govern Florida waterways are proving to be a detriment to their implementation. # Testifying before the House Agriculture Committee, Jackson said her agency’s work was often “mischaracterized” and addressed several myths surrounding its work
EPA Analysis Says Climate Bill’s Cost for Households Would Be ‘Modest’
All the attention on the energy front today is going to the BP spill, but the Environmental Protection Agency quietly released its long-anticipated analysis of
EPA announces hold on nutrient standards if Florida can come up with own criteria
The EPA announced today that it is now prepared to withdraw a portion of its proposed numeric nutrient criteria (a set of standards governing water pollution in inland waters) and delay the portion related to estuarine waters, to allow the state Department of Environmental Protection to develop its own criteria. # From a statement released by the EPA earlier today: # EPA recognizes that states have the primary role in establishing and implementing water quality standards for their waters. Therefore, EPA is prepared to withdraw the federal inland standards and delay the estuarine standards if FDEP adopts, and EPA approves, their own protective and scientifically sound numeric standards
EPA biologist says fracking may be partly to blame for West Virginia fish kill
New documents obtained by an environmental news service show that an EPA analyst believes that wastewater from fracking may be partly responsible for a fish kill in a West Virginia river. Scientific American reports : U.S
EPA Chief Overruled Calif. Waiver, Too
The Washington Post reported in March that EPA Administrator Stephen Johnson was overruled by the White House in setting an ozone standard. Now, documents
EPA and California Near Deal on Fuel Efficiency Standards
Two weeks ago, the Obama administration raised fuel efficiency standards by an average of two miles per gallon -- a modest change that disappointed some