None other than the Secretary of Housing and Urban Development has declared the HUD loan modification program, known as Hope for Homeowners, to be a failure. Steve Preston, HUD Secretary , blamed Congress for the program’s failure. “What people don’t understand is that this program was designed to the detail by Congress”.
The Hope program,originally expected to help almost half a million people, has had only around 300 applications since its launch. The chairman of the House Financial Services Committee blamed the Bush administration for opposing features of the bill that would have made it acceptable to lenders and easy to use by homeowners in default on their mortgages. There have been calls by others on Capital Hill to use a portion of the TARP funds to ease and expand the Hope program.
In theory, the Hope program would have been beneficial to both borrower and lender by turning a defaulted loan into a performing loan. It was structured to refinance a homeowner into a 30 year fixed rate mortgage insured by the FHA.
In reality, features of the Hope program seemed to have been designed to make it unattractive to both borrower and lender. Specific provisions that created problems and made the program basically unworkable for all parties were as follows:
- there was no obligation on the part of lenders to participate
- the FHA would only insure a new loan for up to 90% of the homes value. Cash strapped borrowers had no way of coming up with the cash for the shortfall on what was owed. For example, a homeowner owing $150k on a house now appraised at $100k could get a new low rate mortgage of $90,000 but only if he could come up with the $60k balance due on the original loan. Someone with $60,000 available would probably not be in default on the mortgage. The only other option to bringing $60,000 cash to closing was to request that the lender write down the loan balance to $90,000, which most lenders politely declined to do.
- in order to qualify for the Hope loan, borrowers had to sign a statement testifying to the fact that all of the information they provided on their original loan application was accurate. With the large number of stated income loans done in the past, many borrowers could not sign such a statement.
- fees were to be assessed on any homeowner refinancing under the Hope program, monies that many homeowners did not have.
- there were also limitations on the allowable debt to income ratio on the new loan in order to qualify. Many would not have qualified even under the reduced loan amount and lower payment.
- since the government was sharing with the original lender a portion of the losses on the refinance and loan write down, a portion of any future price appreciation upon sale by the homeowner would be due to the government
The amount of the new loan allowed under the Hope program and insured by the FHA has now been raised to 96.5% in an effort to make a refinance more appealing to the original mortgage lender.
Additional change to the Hope program are expected after the new administration takes over in January.