HUD Chief Calls Aid on Mortgages A Failure

HUD Secretary Steve Preston says "Congress dotted the i's and crossed the t's for us, and unfortunately it has made this program tough to use." (By Chip Somodevilla -- Getty Images)

The list of impediments goes on. Borrowers who participate in the program must pay hefty fees and high interest rates, and they must split any increased value with the federal government when the home is sold.

"You're paying a premium to borrow the money already, and that ought to be enough," said John Taylor, chief executive of the National Community Reinvestment Coalition. "To me this falls into the category of, we want your firstborn."

A further hindrance: The mortgage payment must exceed 31 percent of a borrower's income as of March, which does not help people who have since fallen into trouble.

Add to that the fact that borrowers must also provide two-years of financial records and sign a statement that they did not give false or misleading information on their original loan application and the bar gets even higher. It becomes even more difficult to attract borrowers who took out loans without verifying their income.

"How do you do that?" Preston said. "That was legislated."

For all those reasons, FHA Commissioner Brian Montgomery said he got an earful from agitated lenders, housing counselors and real estate agents at a seminar last month in Atlanta designed to educate housing professionals about the Hope for Homeowners program.

"What we thought would be a civil and cordial exchange with the several hundred people gathered turned into an almost rock-throwing episode," Montgomery said.

He said Capitol Hill lawmakers were hampered by a philosophical divide within their ranks when they cobbled the program together and that led to a compromise that made little sense.

"There were two philosophies on the Hill: Let's throw the barn door open and help as many people as we can regardless of the reasons. Or we need to make them pay because they should have known what they were doing," Montgomery said. "They found some middle philosophical ground, but that philosophical middle ground made [the program] unworkable."

Montgomery complained that any minor adjustment to the program must be passed through an oversight board, which further slows the FHA's response time.

Frank called Montgomery's assessment of Congress's handling of the legislation "dishonest."

As for oversight, he said the board is made up of Bush appointees. "Shame on them if that's the problem."

Frank acknowledged, however, that concessions had to be made to make the program palatable to the American public. This is why borrowers who take part in it must share any gains from appreciation in home values with the government.

"You're not going to get a program approved that helps people refinance loans on their homes and then allows them to turn around the following year and make a profit on that home," Frank said.

Frank provided a letter he wrote to Treasury Secretary Henry M. Paulson Jr. in late November urging him to use the bailout money Congress approved for rescuing the financial markets to reduce the upfront and annual fees, because these are reducing use of the Hope for Homeowners program.

In another letter to Paulson, Preston, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila C. Bair, Frank made a few more suggestions and praised HUD's decision to increase the proportion of loans that the FHA can insure to 96.5 percent from 90 percent.

But yesterday, he said the FHA's leadership in these trying times has been a "disappointment."

Montgomery said Frank's ire at his agency is misdirected. "Barney Frank may have a beef with some of the Republicans," he said, "but he shouldn't have a beef with us."