Last summer, Congress passed the Hope for Homeowners Act, setting aside $300 billion to help people refinance into more affordable mortgages. But the program has been a total flop.
When it was first introduced, the Congressional Budget Office estimated that the program could help 400,000 people keep their homes.
But more than six months after the program was launched, the Federal Housing Administration says only one homeowner has made it all the way through the government program and received the FHA guarantee.
Given that millions of people have slid into foreclosure, a startlingly small number have even applied. The FHA says it has only received 868 applications. Fifty-one of those have been finalized to some degree by lenders. And the FHA has only guaranteed one loan.
But some finance experts say Hope for Homeowners could still play a big role in fixing the housing market and the economy. And there's an effort under way to overhaul the program.
The Program's Origins
Hope for Homeowners was sponsored by Rep. Barney Frank (D-MA), the powerful head of the House Financial Services Committee.
"The problem was when we passed it, and it's interesting how things have changed, we were under pressure from the right," he says. "Remember, it was the Bush administration. So to get it passed we had to dumb it down, which I regretted, but I thought it was better than nothing."
Frank says some lawmakers didn't want to spend taxpayer money on what they saw as a bailout for homeowners. So the lawmakers basically tightened the lid on the program. "The fees were too high. The restrictions on who could enter it were too much," Frank says.
Critics say homeowners didn't like the program, and most couldn't qualify anyway. There were problems with the way the law dealt with second mortgages such as home equity loans. And, perhaps most importantly, there was also no real money in it for the lenders who were supposed to do the work to refinance the borrowers.
"We cut it back, and then the Senate cut it back even further," says Frank, adding that the program got cut back so far it just became unworkable.
A Worthy Idea
Some in the business world say that Hope for Homeowners could have been a really big success if it had been done right. Some think maybe it still could be.
"That's the ultimate frustration," says Scott Simon, a managing director at Pimco, an investment firm that holds more than $500 billion worth of mortgage-backed securities. "There just aren't that many great ideas that come along, and this was actually a pretty great idea."
He says it will go down as one of the biggest busts of all time. But that had nothing to do with the idea behind it.
So what was that idea? Currently, millions of people owe, say, $50,000 or $75,000 more than their house is worth. Many can barely afford their mortgage anyway. Why keep paying?
"Many hardworking, moral, good Americans will do something that they've never dreamed of doing before — walk away from their homes," Simon says.
That's really bad for the economy and the housing market. So Hope for Homeowners aimed to rescue people who have decent jobs and can afford to make payments based on the current value of their homes.
Putting The Idea Into Action
Basically, investors like Simon would have to take a hit and forgive a chunk of money that the borrower owes to get the value of the loan down below what the house is worth.
So a borrower who owed $350,000, but whose house was only worth $300,000, would get a new loan for about $280,000. In exchange for the investor writing down the loan to that lower amount, the government would guarantee that new smaller, affordable loan. The borrower would then be refinanced into that new loan, which would be funded by another lender and guaranteed by the FHA. The original investor would get $280,000 cash and could walk away.
Simon says investors are willing to take losses like that. Foreclosures often cost a lot more money and can drag on for months. And, Simon says, every foreclosure that is prevented by putting a homeowner into a loan that they have the ability and incentive to keep paying can help investors and the whole financial system.
Assistance With Toxic Assets
Ralph Daloisio, a managing director with Natixis, a financial firm that invests in mortgages, also wants to see Hope for Homeowners overhauled to make it workable.
He says a revamped program wouldn't just help homeowners. If it could work on a large scale, he says, it would help stabilize the financial system by getting rid of some of the toxic assets on the balance sheets of many financial firms.
"I call it cauterizing the wound," he says. Removing those loans from pools of securities by refinancing them would be a big help, he adds.
Investor Enthusiasm For Loan Workouts
Some investors say they are willing to lose $50,000 to $70,000, or more, per loan to fix these problem mortgages.
Simon says that, if done right, this could work for millions of homeowners.
Daloisio says so-called loan workouts could be happening on a much larger scale. "If investors were controlling the loans directly, I think we would have seen a lot more of this happen already," he says.
But the loan industry is very tangled up. There are middlemen and other complicating factors. And some regulators say common-sense loan workouts are not happening in the vast majority of cases.
The Obama administration has launched a new initiative to try to change that. And some industry insiders say that's starting to make a difference. Pimco's Simon says getting Hope for Homeowners up and running could play a big role, too.
"This is the missing piece in the government's program," Simon says. It's just a matter of having to lubricate it enough and get rid of some of the impediments, he adds.
The House has passed legislation aimed at fixing Hope for Homeowners. It would lower fees for borrowers and provide some incentives so lenders could make some money refinancing these troubled borrowers. Simon says the proposed changes probably don't go far enough. But the Senate will be working on the issue after the spring recess.