It's MORNING EDITION from NPR News. I'm Steve Inskeep. Good morning.

We're going to look this morning at a growing problem and an effort to fix it that's been a total flop. The problem is home foreclosures. A report out this morning says the number of Americans at risk of losing their homes at the start of this year was up 24 percent compared to the same time last year. There have been a lot of plans to try to help, including one called the Hope for Homeowners act. Congress set aside $300 billion to help refinance people into affordable loans. NPR's Chris Arnold reports on what went wrong.

CHRIS ARNOLD: The Congressional Budget Office estimated that the program could help 400,000 people. But more than six months after it was launched, the Federal Housing Administration says it only helps one homeowner. Just one person has been refinanced into a new affordable government guaranteed loan. Hope for Homeowners was sponsored by the powerful head of the House Financial Services Committee, Barney Frank. We caught up with Frank at one of the his district's offices outside Boston.

As of late March, you know, I think one person admitted all the way through and gotten a re-fi. It's kind of like, what happened?

Representative BARNEY FRANK (Democrat, Massachusetts): The problem was, when we passed it - it's interesting how things have changed - we were under pressure from the right. Remember, it was the Bush administration. And so we had to, to get it passed, dumb it down - which I regretted, but I thought it was better than nothing.

ARNOLD: Some lawmakers were afraid that if the government did this wrong, tax payers could end up on the hook for a lot of bad loans. So they basically tightened the lid down on the program.

Rep. FRANK: The fees were too high. The restrictions on who could enter were too much.

ARNOLD: And the critic says there also was no money in it for the mortgage companies that were supposed to do the work to refinance the borrowers. They've gotten no incentive to take part. So in the end, Congress made $300 billon available for a program that just totally doesn't work. And some very smart people in the business world think that if this would have been done right, it could have been a really big success. Some think maybe it still could be.

Mr. SCOTT SIMON (Managing Director, Pimco): I think that's the ultimate frustration.

ARNOLD: That's Scott Simon, no relation to the NPR host. This Scott Simon invests in mortgages. He is a managing director at Pimco. Pimco is a major investment firm that holds more than $500 billion worth of mortgage-backed securities.

Mr. SIMON: They took what was a fundamentally great idea. By the way, there just aren't that many great ideas that come along. This was actually a pretty great idea. It will go down as one of the like the big busts of all time - and that had nothing to do with the idea.

ARNOLD: Okay. So here's the basic idea. Right now we've got millions of people who owe, say, $50,000 or $75,000 more than their houses even worth. Many of those people can barely afford their mortgage anyway, why should they keep paying?

Mr. SIMON: Many hard working, moral, good Americans will do something that they've never dreamed of doing before, which is they are going to walk away from their homes.

ARNOLD: That's really bad for the economy, and the housing market, and investors like Simon. So Hope for Homeowners aimed to rescue people who have decent jobs, the people who can afford the lower current value of their homes. The investors would have to take a hit. They'd forgive a chunk of money that the borrower owes, shrinking the size of the loan down below what the house is worth. In exchange the government would guarantee a new affordable loan. So the homeowner could refinance with another lender.

Mr. RALPH DALOISIO (Managing Director, Natixis): Investors are willing to take one hit. You don't get yourself into foreclosure and it lingers. A lot of investors are willing to just say one loss, refinance it out, and I'm gone.

ARNOLD: Ralph Daloisio is another investor. He is a managing director with Natixis, a financial firm that invests in mortgages.

Mr. DALOISIO: I call it cauterizing the wound.

ARNOLD: When you cauterize a wound, it's the last resort. It's painful and it's not pretty but you stop the bleeding. And that's what he wants to do, stop the bleeding by fixing as many of the bad loans as possible. And this is actually very interesting. Basically, some investors are right now are jumping up and down, saying that they're willing to lose $50,000, $60,000, $70,000 or more on each loan, in order to fix them and be done with it. And maybe do that for millions of people.

Mr. DALOISIO: I think if investors were controlling the loans directly, I think we would have seen a lot more of this happened already.

ARNOLD: But the industry is very tangled up. There are middlemen, backwards incentives and other complicating factors. Mortgage companies say that they are doing as many loan workouts as they can. But some regulators say that's just not happening in the vast majority of cases. The Obama administration has launched its own initiative to prevent foreclosures. And some people inside the industry say the Obama plan is starting to make a difference. Still foreclosures keep rising. Pimco's Scott Simon says getting this Hope for Homeowners program up and running could be a big part of the solution.

Mr. SIMON: I think this is the missing piece in the government's program. I think this really is potentially a very, very good program.

ARNOLD: The House of Representatives has passed legislation aimed at fixing Hope for Homeowners. Simon doesn't think that changes go far enough but the Senate will be working on the issue after this spring recess.

Chris Arnold, NPR News.

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