All the attention being paid to the government's proposed $700 billion financial rescue package has overshadowed the very problem that kicked off the crisis: defaults on mortgages. And the foreclosure issue hasn't gone away.
But on Wednesday, a federal program intended to help homeowners who are on the brink of foreclosure — and in over their heads — get better loans went into effect.
The Hope for Homeowners program was created by Congress in July as part of the same bill that led to the takeover of Fannie Mae and Freddie Mac. Under the program, Congress authorized the Federal Housing Administration to back up to $300 billion in new loans for homeowners in trouble.
But not everyone likes the program. Some consumer advocates say it has flaws.
Refinancing Gone Bad
In 2006, Diedre McCloud refinanced her home in Waldorf, Md., securing what turned out to be a loan she couldn't afford.
Two years after refinancing, the housing market crashed and home values have plummeted. McCloud says her house is now worth less than what it was appraised for. And because she is upside down on her loan, she can't refinance, and the interest rates are adjusting upward.
McCloud says she has drained her savings and 401(k) retirement account and fears that soon she won't be able to stay current on her payments.
But she isn't excited about the Hope for Homeowners program because she doesn't think she'll qualify. So she asked her lender to modify her existing loan.
"If my payment was put to a reasonable spot that I can afford right now, I can guarantee that it would be that way for the rest of the remainder," McCloud says. "It won't be going to foreclosure, that I can guarantee. But at the rate they're going, they're like, 'Wait, we'll see,' and that's just ludicrous."
Those who qualify for a Hope for Homeowners loan would trade in their adjustable-rate mortgages for 30-year, fixed-rate loans insured by the FHA.
The loan amount would be 90 percent of what their homes are worth now, meaning lenders would in some cases have to cut tens of thousands of dollars from what homeowners owe.
Restrictions On Who Will Qualify
Lenders aren't the only ones involved in the decision, since many of these mortgages were securitized and sold to investors who now have a say.
Christopher George, president of CMG Mortgage Services, a midsize mortgage bank in California, says he expects that huge write-downs won't work for some lenders. But, he says, homeowners could be helped anyway.
"It may not be that you end up refinancing your house under this program," George says. "But you may end up having a very good dialogue with your lender that ultimately gets you to a place where you can afford to stay in your home."
But Bruce Marks, CEO of the nonprofit Neighborhood Assistance Corporation of America, isn't convinced. He says there are major restrictions on who will qualify.
"There are four major roadblocks," Marks says. "Any one of these roadblocks will stop someone from refinancing: Property values are too low. People's credit scores are too low. The underwriting criteria are too restrictive. And second mortgages will not get out of the way."
The corporation counsels people all over the country to try to help them stay in their homes, and Marks says counselors will tell their clients about the program.
But in most cases, he says, there will be a better option.