The government tried to jump-start its stalling foreclosure-prevention program yesterday by adding incentives for lenders, loosening loan-to-value ratios, and allowing lenders to extend mortgage terms to 40 years.
Known as “Hope for Homeowners,” the program originated with this summer’s housing rescue bill. It allocated up to $300 billion to help an estimated 400,000 homeowners escape foreclosure by refinancing into lower-cost loans backed by the Federal Housing Administration (FHA).
Despite the need for such an effort, the response has been underwhelming. Fewer than 50 people applied for the program in the first half of October, when “Hope for Homeowners” became available, according to FHA data. Many suggested early on that the program as established would help only a fraction of borrowers in trouble.
“Clearly, meaningful changes were needed,” HUD Secretary Steve Preston said yesterday. “These modifications should increase lender participation and help more families who are having difficulty paying their existing mortgages, but can afford a new affordable loan insured by HUD's Federal Housing Administration.”
Much like the Federal Housing Finance Agency did last week with its foreclosure-prevention program for Fannie Mae and Freddie Mac loans, HUD is sweetening the deal for those parties who have been reluctant to participate in mortgage modifications. The government agency will now give second-mortgage lenders “an immediate payment in exchange for releasing their liens” on homes that borrowers want to refinance through “Hope for Homeowners.”
These second-mortgage lenders have resisted the program so far because it made no provision for these lenders, who stood to recover nothing if a home and its primary mortgage was refinanced through “Hope for Homeowners.” HUD obviously hopes to overcome this obstacle with this upfront money, although the amount of these payments was not immediately available. "We don’t have a figure yet because the [Hope for Homeowners board] hasn’t voted on it, but it will be pennies on the dollar and not the full loan amount due," a HUD spokesman told BUILDER on Thursday.
Lenders responded positively, if not enthusiastically, to the news.
"Expanding the eligibility criteria and making the program less expensive for both the borrower and the lenders will allow us help more borrowers,” said John A. Courson, the Mortgage Bankers Association’s chief operating officer said in a statement Wednesday. “By agreeing to immediately compensate subordinate lien holders, HUD is providing additional incentive for those lien holders to release their liens, which will free more borrowers to access the Hope for Homeowners Program."
Preston also loosened the loan-to-value ratio limitations for homeowners with lower household debt loads, but still in need of a more affordable mortgage. Those borrowers will able to obtain a Hope for Homeowners loan for up to 96.5 percent of their home’s assessed value; riskier borrowers will have to stick with a 80 percent loan-to-value ratio.
Finally, lenders may extend mortgage terms to as long as 40 years, which should lower payments for cash-strapped borrowers.
Alison Rice is senior editor, online, at BUILDER magazine.