Government's Mortgage Bailout Under Attack

For Sale Signs
For Sale Signs

Today House Republicans will take up arms against a sea of government housing bailouts, voting to abolish the Federal Housing Authority's (FHA) $14B Short Refi program and the $1B Emergency Mortgage Relief Program. Next week they will take up the $29B Home Affordable Modification Program (HAMP) and the $7B Neighborhood Stabilization Program.

The argument is that none of these programs are working and that they are a waste of taxpayer dollars. The mortgage modification program, a particular thorn: "Not only is this a failing program, it's a failing program that causes real financial pain to the very people it was set up to help," writes Rep. Patrick McHenry (R-NC), Chairman of the Oversight Subcommittee on TARP, in a press release.

Administration officials have tried to defend the programs, admitting they haven't performed as expected, but urging that they be given a longer life. "These programs are continuing to help people, and we don't see that the critics are offering any alternatives," said Tim Massad, Acting Asst. Treasury Secretary for Financial Security, on a conference call yesterday.

FHA Commissioner David Stevens has been a staunch advocate of the FHA Short Refi, which targets underwater, but still current loans; he told a House subcommittee Wednesday that 23 approved lenders are signed up to participate. This program requires lenders to write down at least 10 percent of the loan principal balance. His greatest enemies in this battle are Fannie Mae and Freddie Mac. Neither one will participate in the program, not wanting to write down principal on still-performing loans. So far 44 loans have been endorsed.

Speaking of reducing principal, I want to take the state of Arizona as an example.

Another government program, not yet targeted by Republicans, is the Treasury's $7.6B "Hardest Hit Fund." It has been allocated to eighteen states and DC, states which have been deemed to be hardest hit by unemployment and home price declines. The states are supposed to develop their own programs to use the money.

Arizona, which has one of the highest foreclosure rates in the country, launched the "Save My Home AZ" program last September. It requires lenders to write down principal up to $100,000, which is highly necessary in Arizona where over half of all mortgages are underwater. The lenders/banks split that cost with the state, which has $125 million allotted by the Hardest Hit fund.

To date, the program has served exactly ONE borrowerbecause only ONE bank, the National Bank of Arizona, would participate.

However, this week, Bank of America announced it would join Arizona's pilot program. "The bank has become the first major mortgage servicer to send letters of interest to homeowners who may qualify for HHF-supported principal reductions in these states," notes the press release.

So what am I getting at here?

I'm not defending the government programs, trust me.

The promises have been empty. Empty.

The pace has been mind-numbingly slow, and the results abysmal. But as the mortgage market sinks deeper into despair (and I don't believe things are really and truly improving when it comes to handling all the still-troubled loans), banks are warming up to principal write-down. And I'm no fan of that, as I think it's hugely unfair to the rest of us. But principal forgiveness has always been a sticking point, always the barrier to entry for success in some of the government and proprietary modification programs. So is it really time now to throw away the government assistance, and all the dollars and man-hours spent on these programs, when they may just finally have a fighting chance?

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick