A few months ago while testifying before Congress, lenders praised the government's foreclosure prevention program but indicated that they preferred to use their own modification programs. As part of the housing rescue bill passed by Congress in July (not to be confused with the bailout bill passed in October), homeowners in trouble have been able to refinance their mortgages with the backing of the Federal Housing Authority (FHA) starting October 1st.
However, after 8 weeks fewer than 100 applications have been made for the Hope for Homeowners program. A main reason lender's are not enthusiastic is that the program calls for them to reduce loan balances to 90% of a home's current market value. In addition, the lender has to pay an upfront mortgage insurance fee of 3% of the loan balance to the FHA.
A Senior Vice President for JP Morgan Chase Home Lending, testified about the drawbacks of Hope for Homeowners. "Under the Program, [investors in the loans] will take a loss when the principal balance is written down," she testified, adding that they won't have a chance to make up that loss if home prices recover. Sheehan added that Chase can help many borrowers' by reducing their interest rates, thereby making their monthly payments more affordable.
Other lenders such as Bank of America, Wells Fargo and IndyMac (which was taken over by the FDIC in July) agreed and stated that they prefer to use the FHA program as just one of several options. When directly asked whether the program would be considered a last resort, all the members of the panel agreed that it would be.
The bank executives said that their responsibility to maximize profits for the investors would probably limit the number of cases in which the Hope for Homeowners program would be used. All of the lenders also stressed that their efforts with loan modification programs and the increasing number of workouts that they have been doing.
Because of this disappointing response, the US Housing and Urban Development Secretary Preston announced that major changes were being made to help more home borrowers. The major change is increasing the loan to value to 96.5% from the previous 90% for some situations. This means that lenders will not have to write down the balances as much and make them more likely to participate in the program. Other changes include changing the way 2nd mortgage holders are paid off, making the process simpler and again increasing the chances that lenders will assist home owners.
Together, these changes will hopefully help more homeowners avoid foreclosure and offer another solution if a loan modification alone will not work. Despite these relaxed terms, the FHA will still use the same standards to ensure that home owners will have enough income and the ability to repay the loans. Although its mission is to help provide affordable financing, the FHA needs to make sure that it does so in a responsible way that is sustainable.
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Roland Carrillo, PhD
Branch Manager
VanDyk Mortgage in Cary, NC
Email: rjcarrillo@gmail.com
Website: http://www.mymortgageanalysis.com/
Our branch specializes in affordable lending options including FHA / VA and the Community Heros program. As both a banker and a broker, you have access to a full menu of products including all Fannie Mae and Freddie Mac Conforming loans, Reverse, Jumbo and Commercial financing on a variety of property types. We are located in Cary, North Carolina and are within easy reach of the entire RTP Area including Wake, Durham and Orange Counties.
It'll be interesting to see if it changes anything. I suspect it won't. A national program with so little interest is a waste of time and resources.
I think Brian hit the nail on the head. It's apparent that banks and investors just aren't motivated by measly small percentages.
I guess I should be asking you, Roland. How are they going to change the way 2nds are handled?
Brian & Vickie - I agree, this will probably raise it on the list of options for banks... but won't be a top choice. The changes are an improvement but still requires a lot of loss to the bank with little reward. The only benefit is they get the loan off the books and can move on, but banks are reluctant to do that on any loan that has a chance to be paid back (with interest).
It was a great political move during an election season, but the lack of response is no surprise to most in the mortgage industry.
Elizabeth - On the original H4H program there was no provision for 2nd mortgage holders to get paid. So basically, once you refinanced the first mortgage they were out of luck and recovered nothing. The revision offers 2nd mortgage lenders an "immediate payment in exchange for releasing their liens" if the borrowers use the H4H program.
The good news is that they will get upfront money. The bad news, the amount of this payment and how it will be calculated hasn't exactly been worked out yet (last time I researched at least). It is expected to be pennies on the dollar so there will be reluctance still. The theory here is that something is better than nothing and some lenders will jump on board.