Remember the housing bailout that Congress passed in July?
Called Hope for Homeowners, the $300 billion program has yet to get off the ground. Thousands of desperate homeowners who have sought help are being told that details haven't been worked out yet.
And critics are already calling it too little, too late.
Perhaps for that reason, there is now talk in Congress of doing another housing rescue plan.
Hope for Homeowners, which officially opened its doors Oct 1. at the Federal Housing Administration, could avoid 400,000 foreclosures over the next three years, according to the Congressional Budget Office.
But several million foreclosures are expected during that time, and critics say there are still major hindrances for the new program to work at all.
The program aims to help borrowers who are threatened with losing their homes gain new government-guaranteed 30-year fixed-rate mortgages.
It requires lenders be willing to substitute existing mortgagesfor new ones written to 90 percent of the new appraised value of the homes—in effect making lenders put up 10 percent equity—besides taking the write-down.
“This program—just like everything else the government has tried so far—is too little, too late,” says Kathleen Day, a spokesperson for Center of Responsible Lending, a nonpartisan research and policy organization, which projects there will be 2.2 million foreclosures from now to the end of 2009. "It will just not have the impact that is needed."
That also seems the view from the front lines of the worst housing crisis since the Great Depression.
Chris Rines, executive vice president of Citizens Home Loans, a mortgage bank and brokerage in Dayton, Ohio, says banks and private investors—who put up the money for mortgages—will balk at underwriting new mortgages for borrowers with credit scores under 580.
But these are the program’s intended beneficiaries; those falling behind in payments will have eroded credit scores, and some major underwriters are raising the new threshold to a score of 600 or more.
Nor will investors be willing to write down the existing mortgages, if payments are still current.
Under this program, if the home is now valued at $100,000, underwriters must be willing to write a new mortgage for $90,000.
He says this Catch-22 is the result of inadequate consultation between government and private investors, who will likely have to wait months longer to get critical program details before they can figure out if they can make money under the program.
But while this is being worked out, Rines’ office is being flooded with "desperate calls for help" from homeowners—at least 150 a week since his company was posted on the FHA website. But he has little to offer them.
“It’s frustrating for us that we got to tell these people that unfortunately at this moment there just isn’t enough information," he says. "And it is kind of hard for them to understand, especially when they have sheriff’s notice on their door and they have kids. You know, it’s tough.”
Under a similar FHA program also aimed at avoiding foreclosures, FHASecure, launched a year ago, Rines managed to complete one loan – just last week – after trying with 25 different other loans.
He said it took six months after FHASecure was launched before there were sufficient details for private investors to seriously considering participating and Rines said he expected a similar timeline.
That’s not far from others’ expectations. “Our doors are open but we are probably still in the vestibule,” conceded Bill Glavin, special assistant to the FHA Commissioner, who said it would be at least another 45 days – “if then” - before the first new mortgages are written.
Industry groups say they welcome the program as “another tool” to avoid foreclosures, which the industry contends entails more losses for investors than modest write-downs.
But John Courson, chief operating officer of the Mortgage Bankers Association, said he considered the new program “will be used after all the other loss mitigation or forbearance opportunities have been exhausted."
“It has the potential to have a significant impact,” said Larry Gilmore, deputy director of Hope Now Alliance, a private sector initiative among investors, servicers, and lenders to avoid foreclosures.
It requires both borrower and lender to “put a piece of flesh on the table,” according to Rod Alba, senior counsel at the American Bankers Association.
Despite the hit to lenders, Alba says his members are “very encouraged” to participate but are still analyzing whether the program makes sense for them.
Glavin admitted that current industry participation—just 80 lenders have signed up so far—is not yet at “meaningful numbers” but expressed confidence this will rise. The government will begin offering training for the industry starting next month, he added.
Borrowers who are able to stay in their homes as a result of this program will forfeit at least 50 percent of future home value appreciation to the government, which seem to be tougher terms than Uncle Sam has demanded from financial institutions it has bailed out.
Another obstacle is the potential spoiler role that holders of second liens could have if they opt to move to foreclosures, rather than accept 9-12 percent of any future appreciation (from Uncle Sam's share) that the government is currently offering.
Under a provision in the recent bailout package, these second lien investors could possibly get this money up front rather than having to wait for a sale, Glavin explained.
But there are broader problems with this and other initiatives currently underway to stem foreclosures, which Day argues dooms all these efforts.
“Anything that is voluntary is not going to work,” argues Day, who says there will have to be mandatory mass loan modification such as Sheila Bair, head of the Federal Deposit Insurance Corporation (FDIC) has recently suggested, and is trying to do with borrowers of IndyMac, the bank that the government recently took over.
Industry officials admit they do not have the manpower to quickly handle the tidal wave of loans that need to be renegotiated.
Alba says there is increasing talk about significant changes afoot, including possibly allowing bankruptcy judges to alter primary residential mortgages, as they currently can for vacation homes and commercial property, a change Senator Chris Dodd now favors.
Rines says he is also convinced the government will have to step in to buy threatened mortgages outright or jointly underwriting new mortgages with private investors.
Hope Now says they have helped avoid 2.3 million foreclosures during the past year, but Day says this vastly overstates the real number of avoided foreclosures, which is part of the industry's effort to forestall tougher action from Congress.