The federal government calls its new foreclosure-prevention program "Hope for Homeowners" and suggests it will help as many as 400,000 financially strapped borrowers stay in their homes by refinancing into new, more-affordable 30-year fixed-rate home loans backed by the Federal Housing Administration (FHA).
But industry watchers suspect that this new program, created as part of this summer's housing rescue legislation and launched last week, will end up helping only a fraction of the American homeowners at risk of foreclosure despite the government's willingness to guarantee as much as $300 billion in such mortgages.
"I think [the government is] going to be disappointed that more [of the money available] isn't used," predicts David Ledford staff vice president for housing financing and housing policy at the National Association of Home Builders. He thinks that 400,000 is an "overly optimistic" estimate for the number of borrowers who will be helped by this program, which is voluntary for lenders. "There is clearly demand for this, but a lot of people won't qualify or their mortgage holder won't participate."
Rick Sharga, senior vice president at RealtyTrac in Irvine, Calif., agrees. "I think the real question will be how readily and rapidly the banks will move their loans into these programs."
Why? Because, like so much of the current economic crisis, a home in foreclosure is tied to so many people and companies, all with different financial priorities. The rules for foreclosure also vary from state to state. "The system that the industry has in place for managing the default process is woefully inadequate for the volume of homes currently in foreclosure," says Sharga, whose firm recently reported that almost 304,000 properties entered the foreclosure process in August.
There's the homeowner, who (theoretically) wants to stay in the home. There's the first-mortgage lender, which loaned the majority of the money needed to purchase the house. In many high-priced housing markets, numerous home buyers also took out a second mortgage known as a piggyback loan to cover the 5 percent to 10 percent of the home price that they just couldn't amass for the down payment.
And, since many lenders don't keep or manage the loans they originate, there's also the loan servicer, who has the responsibility for collecting that money and crediting it to the homeowner. Finally, as many Americans are now aware thanks to the financial bailout, many loans are now packaged into bundles of mortgage-backed securities for investors around the globe.
(Unfortunately for builders and homeowners alike, the securitization of these home loans has probably intensified and prolonged the foreclosure crisis, which is having dramatic effects on the new-home market as well as the larger U.S. economy. "Contractually, servicers have been unable to make the loan modifications and forbearances that would have helped people stay in their homes because the loans have been securitized by Wall Street," Sharga says.)
So who is eligible for the program? According to HUD, borrowers may qualify for Hope for Homeowners if they live in the home threatened with foreclosure; if they cannot afford to pay their mortgage and their monthly payment was greater than 31 percent of their gross monthly income; if the mortgage was originated on or before Jan. 1, 2008, and they have made at least six payments; and if they did not lie on their mortgage application.
Technically, borrowers don't need to have missed a mortgage payment to be eligible, says the NAHB's Ledford, but lenders probably won't agree to a Hope for Homeowners refinancing unless the borrower is in serious risk of foreclosure because of the financial impact on the lender, which could be considerable.
Here's how Hope for Homeowners works: If a borrower wants to participate, and the lender agrees, the borrower's loan is written down to 90 percent of the home's assessed value; the lender receives 87 percent of the proceeds of the home's new assessed value to pay off the note, and the borrower gets a new 30-year fixed-rate mortgage backed by the FHA.
For those government-backed refinancings that do occur, 3 percent of the proceeds will go toward paying an upfront mortgage premium. The remaining 10 percent will become equity in the property, with the understanding that the homeowner and Uncle Sam will share in the equity and appreciation when and if the home is sold.
This refinancing means that a lender must agree to take a potentially significant loss on the deal, since the home's new value may be thousands of dollars less than the amount of the mortgage loan that is still outstanding.
It sounds like a painful deal for lenders, but with home values continuing to crater, banks may decide to take it. "At least with this program you receive a definitive value that you know you are doing to get," Ledford says, hopefully. After all, just this week Bank of America announced it would restructure an estimated 400,000 loans as part of a legal settlement with several states over lending practices at Countrywide Financial, which Bank of America acquired this year.
Lenders who provided piggyback loans to borrowers, however, would be out of luck under this program unless a primary lender agrees to share the refinancing proceeds. As a result, second-mortgage holders "have no reason to agree" to a Hope for Homeowners workout, Ledford says.
Alison Rice is senior editor, online, at BUILDER magazine.