Hope for Homeowners' Gets a Slow Start
Source: money.cnn.com
Date: October 22, 2008
NEW YORK (Money) -- Everyone agrees that the only way to fix the financial crisis is to fix the housing market.
Yet hundreds of billions of taxpayer dollars are being used to shore up failing banks.
So far, efforts to stem the tide of foreclosures and put a floor under housing prices are off to a much slower start.
Consider the $300 billion Hope for Homeowners program, signed into law in July, which officially launched on Oct. 1.
Lenders have been deluged with inquiries from interested borrowers, and the Congressional Budget Office has estimated that this program could help as many as 400,000 homeowners through September 2011, when the program ends.
Meanwhile, two million families are expected to lose their homes to foreclosure in the next two years. So far, the program has made little progress so far for three key reasons:
First, the program is voluntary for lenders. And it requires them to take a loss.
It allows certain borrowers at risk of foreclosure to refinance into a 30- year fixed-rate loan insured by the Federal Housing Administration (FHA) if the current lender agrees to write down the existing loan to 90% of the home's market value today.
In plummeting areas such as California, if a lender holds a $500,000 mortgage and the home's current appraisal comes in at $400,000, the lender would forgive $140,000 in all.
Even before the program launched, lenders expressed concerns about the potentially enormous write downs they would face.
So far banks and investors have been reluctant to write down loan balances. From July 2007 through June 2008 only about 1.5% of subprime loan modifications actually reduced the principal balance, according to research from Alan White, assistant professor at Valparaiso Law School in Indiana. That percentage climbed to about 7.5% in August and September, but still represents a relatively small amount of total loan modifications, he says.
Last week, the FHA posted the names and contact information for 77 lenders participating in the program. They are predominantly smaller shops that can help borrowers refinance into the new FHA loans after the current lender gives the green light.
The big banks like Wells Fargo (WFC, Fortune 500) aren't on the list because they intend to first focus on helping their own troubled borrowers rather than putting new customers into FHA backed loans. Meanwhile, Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) are still determining the extent to which they will participate.
Of course a big issue is who actually can make that call. Because so many mortgages are packaged into securities and sold, it is often the investors who call the shots. Consulting them is a time consuming process, and of course not all of them are willing to cooperate.
And even after banks are ready to enter the program, loan modifications can take months to complete. "It is not an overnight process," says Heidi Lawler, president of Affinity Homeloans in San Diego. "It is taking anywhere from three to five months for the current lender to decide with the investors whether they will do a write down." Lawler has also been inundated with phone calls from borrowers wanting to jump start the process.
To qualify, borrowers must be at risk of foreclosure, their home needs to be their primary and only residence, and they have to document their income to show that their existing monthly mortgage payment tops 31% of their gross monthly income as of March 2008.
The government says it is too early to tell if the program is off to a rocky start. "I don't think you can say one way or the other," says Bill Glavin, special assistant to the FHA commissioner, who notes that it generally takes at least 45 to 60 days to complete the process for a regular FHA loan. "We know the interest from the public is there, and the next question that can't be answered yet is are the lenders going to do this?"
