Face-Lift for Foreclosure Prevention
Federal Program For Loan Workouts Draws New Allies

By Renae Merle
Washington Post Staff Writer
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.

The new Mortgage Investors Coalition has embraced the program and is repeating an argument often made by consumer advocates that loan modifications that include principal reductions are the most effective methods for helping homeowners, especially in parts of the country where home values have tumbled the most.

"Hope for Homeowners more broadly addresses the issues of housing stabilization, negative equity and affordability, whereas current modification programs are cosmetic fixes that are not addressing the underlying equity problem," said Thomas C. Priore, chief executive of ICP Capital, a New York fixed-income investment firm that helped start the investors coalition.

There is another reason the investors support the program: They want to cut ties with troubled borrowers. While a traditional loan modification keeps a problem mortgage in an investor's portfolio and the homeowner could default again, Hope for Homeowners sweeps the mortgage off its books. The government program refinances the borrower into a new loan that can be held by a different investor.

The program creates a market for these loans that institutional investors otherwise would struggle to sell, officials in the financial services industry said. And as the industry strives to put the growing losses of the housing crisis behind them, in some cases it may be better to accept them now than hope to sell the securities later, they said.

"Both investors and borrowers' incentives are aligned to make this program work, because investors want to take their losses now, and borrowers want to get into a more sustainable mortgage," Deutsch said.

But the program has some potential stumbling blocks, particularly in how first- and second-lien holders are treated, said Micah Green, a partner with Patton Boggs. The lobbying firm was hired by the Mortgage Investors Coalition, which represents investors with more than $100 billion in mortgage-backed securities, Green said.

Many first mortgages are held by investors in large pools, while the majority of second liens are on the books of large banks, he said. Second-lien holders are forced to take substantial losses or are nearly wiped out under Hope for Homeowners regulations and have refused to participate in the program, Green said.

Under the legislation signed by President Obama last week, second-lien holders could share in the profits if borrowers sell their home after refinancing. But that may not be enough to persuade them to participate, Green said. For instance, under the government's other large foreclosure prevention plan, Making Home Affordable, second-lien holders are also eligible for incentive payments.

Until government regulators address the imbalance, Hope for Homeowners "will not be sufficiently utilized," Green said. "If you create a balance between the two, there is a better chance that homeowners will not only be able to stay in their homes but begin to have positive equity in their homes, providing the incentive to stay."