Revised Homeowners' Aid Plan Finds New Potential Backers
Tuesday, May 26, 2009
The Obama administration is attempting to revive a stalled government foreclosure prevention program that could restore equity to hundreds of thousands of borrowers whose home values have plummeted.
After eight months, the program, known as Hope for Homeowners, has helped just one borrower secure a more affordable loan. President Obama signed legislation last week simplifying and lowering the cost of the program for lenders and borrowers. Lenders that participate also are eligible for incentive payments from government bailout funds.
Most striking is that Hope for Homeowners has attracted unexpected backers: Investors who had refused to consider the program's requirement that they forgive some of a borrower's mortgage balance if the home is worth less than is owed, known as being underwater, are now trumpeting that provision.
"Institutional investors that own securities backed by mortgages are extremely keen to write down principal in exchange for the borrower refinancing into a Hope for Homeowners loan," said Tom Deutsch, deputy executive director of the industry group American Securitization Forum.
The growing weakness in the housing market -- more people are falling into foreclosure as they lose their jobs, and home values continue to tumble -- has pushed some investors to accept more losses. About one in five homeowners is underwater, and that proportion is expected to grow as home values continue to fall.
Negative equity is the best predictor of foreclosure, said Alan M. White, an assistant professor at Valparaiso University School of Law, who has followed foreclosure prevention efforts. "It's because people who can't afford it won't struggle to save a house that's underwater. Negative equity de-motivates people."
It is better to cut ties with the homeowner now, even if it means taking a loss on the investment, than risk the homeowner becoming delinquent later, financial industry insiders are now arguing.
Still, it is unclear how widely the program will be used, and much will depend on how the revised program is implemented, industry officials said. Hope for Homeowners had been hobbled by restrictions that made it unattractive to lenders and borrowers. When the program was announced in October, it was projected to help 400,000 homeowners.
Fisher Financial, an Arizona-based mortgage bank, closed the sole Hope for Homeowners loan currently backed by the government. The homeowner received a new loan worth $130,000, nearly half of the original $237,000 debt. But investor groups and large banks have not been willing to buy other refinanced loans the company has attempted to get through the process, and Fisher stopped taking applications in March, said Chad Fisher, the company's president. Fisher Financial financed the first deal itself to test how the program worked, he said.
"We're hopeful that with the changes, the program will evolve into what it's supposed to be," Fisher said. "But we're not physically taking the applications because there is a lot of time involved, and we need to know this is a viable option."
The Department of Housing and Urban Development, which runs the program, said it will be relaunched soon with new rules. "The current Hope for Homeowners is a very small, flawed program," said Melanie Roussell, a HUD spokeswoman.
The program has already developed new fans.