Hope For Homeowners FHA Bailout a Flop

Posted on October 29th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

You wonder why the government needs so many bailout programs? Right…because none of them work. Below is an excerpt from a friend and blogger Anthony Freed of Your Mortgage or Your Life.

While I knew from onset that there would be no way banks would write down principal balances to 90% or less of the value of their home and jeopardize their FHA approval by giving bad borrowers new loans, these numbers even shocked me. What pisses me off the most is the fanfare all of these programs bring about when announced.  Time and time again we have heard about new programs that are suppose to save the world and each time they have been a failure. This is one of the next examples yet. -Best Mr Mortgage

No Hope For Homeowners – Foreclosure Prevention Program Falters

How about the dandy “Hope for Homeowners” program, designed to help more than 400,000 homeowners avoid foreclosure by making as much as $300 billion dollars available for the effort.  What a fantastic idea, it would seem at first glance. Of course, the Devil really is in the details.

As of today, October 27, 2008 – nearly four weeks since the program was unveiled – a remarkable 79 people have applied for the program (Fox News 8-27-08).

Yes, 79 homeowners have been accepted (Fox News 8-27-08).

There are at least 77 banks participating in the program. I am not going to try to do that math in my head, but my best guess is that each of those banks has only helped about one homeowner avoid foreclosure on average in that 27 day period.

With all of the poorly underwritten loans Countrywide booked – and the tens of billions of dollars in profits they made in the process – one would think they might be on the list of participating lenders.  Not surprisingly, they are not.  Although a unit of Bank of America now, there has been no indication they will assume the responsibility for modification of existing Countrywide loans.

My first impression was that this had to be due to a simple lack of awareness by the public that such a program was available to them. Not the case at all I have found. The program has generated a great deal of interest from distressed homeowners since it was unveiled.

Lenders have been deluged with inquiries from interested borrowers, and the Congressional Budget Office has estimated that this program could help as many as 400,000 homeowners through September 2011, when the program ends.

“Our phones have been going crazy,” said Anthony Logan, president of Group Capital Mortgage in Cerritos, Calif, a participating lender.

What’s the hold up?  Why, it’s the program itself, which was designed almost certainly to fail. First of all, the program is completely voluntary for both the lenders and the participating banks. It also requires the lenders to forgive a portion of the original loan balance in an effort to bring the mortgage in line with the market and affordability for the borrower to enter a long term fixed mortgage.

It allows certain borrowers at risk of foreclosure to refinance into a 30- year fixed-rate loan insured by the Federal Housing Administration (FHA) if the current lender agrees to write down the existing loan to 90% of the home’s market value today. In plummeting areas such as California, if a lender holds a $500,000 mortgage and the home’s current appraisal comes in at $400,000, the lender would forgive $140,000 in all. Even before the program launched, lenders expressed concerns about the potentially enormous write downs they would face.

Incredibly, in the face of receiving the largest publicly funded bailout of private industry in history, supposedly caused by nonperforming securities backed by rapidly foreclosing mortgages, the banks themselves are refusing to use a portion of that bailout money to help alleviate the very circumstances that had predicated the public bailout in the first place.

Refinancing into the new government-backed program requires your current lender’s approval. If the home’s value is less than the mortgage — which real estate data provider Zillow.com estimates applies to nearly one-third of American borrowers who bought in the last five years — the note’s owner must also agree to reduce the amount owed on the house to 90 percent of its current appraised value. If you owe $190,000 on a house that’s only worth that much, the bank would have to agree to reduce the loan to $171,000, giving up $19,000 in principal, plus interest.”

Meanwhile, two million families are expected to lose their homes to foreclosure in the next two years.

There is a serious leadership vacuum in this country, especially at the upper echelons of both government and business. Their priorities and policies are bankrupting our nation, and the close relationship between these private industries and our government regulatory agencies should be rigorously examined.

Archive For Mr Mortgage’s Personal Opinions/Research

21 Responses to “Hope For Homeowners FHA Bailout a Flop”

  1. The fact that banks do not want to recognize the market value of these homes on their books tells me that they would rather take their chances with some future event than deal with reality today. This situation could go on for quite a while. But I dont know all the laws around how a bank must recognize the various conditions of a loan..i.e..non-performing that goes to foreclosure processing and then to actual foreclosure and sale. If the only time the bank must recognize the loss on their books is when the sale takes place, then it stands to reason that they would want to avoid this event for as long as possible. Or [erhaps in this case, the re-pricing of a loan to 90% of it’s current market value.

  2. I think the bottom line to this whole fiasco is home prices will have to fall low enough for the average bankrupt, no-savings, financially ignorant American to put down 20-30%.

    I heard that only 3% of Americans actually have over 100k in cash (if any at all).

    If this is true, we may see prices dropping back down to pre-2000.

  3. Most of the folks who are buying foreclosures and REOs is domestic and foreign investors. At least in the Southern California area.
    od, I agree with you.

  4. Mr. M. you picked up on that story I see…

    How truly sad is that and if you visit the site you will find that the latest update list 120+ lenders participating as of this past Monday. So just over half of the participants helped one family out each.

    Now take a look at the third quarter numbers for foreclosures and you will find that we are now averaging 8,500 per day!!! So 79 people in 27 days is just not going to get it done. That is like spitting on a forrest fire to try and put it out…

  5. Why are people (borrowers) not taking responsibility in this country? Why don’t these people pay their damn bills? They signed the mortgage contract, but didn’t read it and now they’re just walking away to avoid their B.S. “mistake.” Now I, we, the tax payer will have to pay for their incompetence. Great!

  6. my thought when this thing came out was “how are they going to rework an exotic loan into a fixed loan?” There’s just no way to do it and only knock off 10-20% of the exotic loan!
    A $2500/mo mortgage payment buys you (roughly):
    * $400k 30yr fixed
    * $470k IO (and will recast upwards)
    * $704k OptionARM (and will recast WAY upwards)

  7. j, my guess is because they are very, very intelligent people. Think about this for a minute. If you were $200,000.00 in the hole on a depreciating asset and your best guess told you when things turn in a few more years you may get 1%-3% back per year on it for the next 10-20 years, what would you do? I would run like hell personally. The laws are in place to allow for this with a penalty of 3-4 years of bad credit and probably after this mess you may be scared for 7 years. This law was supposed to be taken into consideration when handing out money to strangers that they may indeed walk if thing’s turns sour. It is called no skin in the game which is why people are walking in droves. Greedy banks allowed this to occur and our useless fools in Congress sat by and watched it all happen without a word being spoken. They didn’t want to upset their biggest campaign contributors. They didn’t want the fun to stop. The spending and the parties were a good thing. While the cat is away the mice do indeed play and play they did with OUR MONEY!!!

    One Day – One Vote!!!

  8. Stu,

    I guess your right if you don’t care about credit. And in a world where credit is obsolete (because the banks won’t lend)I guess it doesn’t matter what your score is.

    It also doesn’t matter if you don’t believe or trust in the credit system (like many don’t)where you get a score based on how reliable you are at borrowing money, and paying interest.

    It’s like having a score for being a sucker. A sucker who is willing to donate their blood (money lost in interest)over long (reliable) periods of time.

  9. Lets face it. The past 30 years have been one big,debt-ridden, over-inflated, over leveraged, smokey mirrored, side show based on ‘credit’.

    When people realize that the whole concept behind ‘credit’ is fraudulent, the show will be over. No matter how much the Fed or Gov’t tries to prop it up, it will fail. The over-leveraged, debt-ridden society has had enough. Everything just costs way too much! Without lending, nobody can afford anything.

    People are broke. Counties are broke. States are broke. Countries are broke! WAKE UP.

  10. Stu, od: sounds like all you both have to say for this fiasco is excuses, excuses. Typical of the American way…”take no responsibility for your actions.”

  11. stu, I don’t find these borrows who are walking intelligent one bit. Just because borrows are underwater doesn’t mean it’s an excuse to just say “screw it, I ‘ll go rent for 7 years then maybe come back and do it all over again.” Intelligent, give me a break.

  12. J, It is not the borrowers responsibility to pay the bills, it is the banks responsibility to make sound loans, that is the problem.

    It is the banks responsibility to protect itself, its shareholders and its depositors money. To that end, the banks should require a significant down payment, credit score and debt to income ratios. These are the items that need to be adhered to high standards. In addition, the non recourse provisions in the law leave the bank with the property in the event of default.

    If the lenders stretch the guidelines to allow mass numbers to enter the housing market by lowering standards and introduction of exotic loans, it forces up demand which increases housing prices.

    The increase in housing prices increases the risk to the loan by the fact that a change in lending standards (tightening) and removal of exotic products forces down the pool of available buyers decreasing demand.

    Blaming the buyer of the homes for defaulting would be like a trucking company with poor hiring standards blaming the employees for a high number of accidents.

    At the same time, there also has to be regulation of lending products. You cannot expect banks to stand buy and lose business if another player has more saleable product. Banks have to make loans to stay in business, so banks need to operate in a level playing field that allows them to make sound loans without undue competition which encourages them to make bad loans to keep market share.

    The unfortunate part is that the taxpayer is going to end up footing the bill for lack of oversight.

  13. J,

    I can see where you are coming from but I have to disagree. Yes, many home buyers over the past few years bought beyond their means. I think the reason in a lot of cases was that it was a no risk investment. They could potentially make an incredible profit on their no money down investment and if the house declined in value, they could walk away with no cost to them. But on the flip side, the bank was making an investment as well. They knew the risks of lending with little or no money down. They knew the buyer could walk and leave them holding the bag. But they made the loan.

    Regarding the intelligence of these decisions, I would have to say people who pay more than double for their mortgage than they would for rent are making an intelligent decision. It may not be popular, but it in their own best interest to do it. Morality aside, would you argue that paying $4000 a month to essentially rent your own house is a smarter move than paying $2000 to rent one which you don’t have to pay prop tax on or fix anything that breaks in the house? Additionally, renters have the flexibility to move on fairly short notice. Severerly underwater homeowners do not.

    As a side note, since overextended credit (whether valid or fraudulent) is really the root of this entire crisis, isn’t a foreclosure a step in the right direction? It seems to me like some forced financial discipline to those who have not lived within their means is just what the doctor ordered. Now these people will only be able to buy what they can pay cash for and whether they like it or not, they will learn a lesson in financial responsability.

  14. All I here from you bloggers is excuses. You must all be Mortgage brokers.

  15. Partyboy: I agree on your last paragraph. But! These borrows, no matter what should pay the mortgage. They saw this coming (they reset of their monthly payment). It’s in the contract. If it wasn’t, then I see how the borrower was cheated. Then it’s the banks problem. Then you wrote… “Morals aside.” Here we go with not having any responsibility or integrity in this country.

  16. J, I suppose the underwater homeowner could make a claim against the banks for pulling lending products and making unsound products for crashing the market and causing undue losses, even causing an economic recession causing job losses etc. Put before a jury and all the evidence in place, the banks would likely lose and have to pay up big.

    Would the jury look at the loan products and lending standards or would they look at the borrower as being the chief culprit?

    Now have some video with your blogging….


  17. J, with all due respect I don’t think you get the situation and how we got where we are at. Please allow me to try and explain things better.

    1. Banks lent money to people with no money down, no documentation and in many cases no job.
    2. People lined up for these loans to buy homes that the world screamed would only go up and they would never go down.
    3. The unsustainable market crashed as expected by many including myself.
    4. People with no money in the game see a legal escape clause and take it.
    5. Banks tumble in value due to the party being over.
    6. Congress finally wakes up and takes tax payer money and throws billions to try and prop back up the markets.
    7. Congres, Feds, and Treasury fail miserably because that was what caused the problem to begin with. You can’t fix a problem when the solution is in fact the problem to begin with.
    8. Tax payers take it in the shorts.
    9. Elections arrive.
    10. If we are lucky we see each and every incumbant get voted out of office for their incompetence.

    HOw is that J? See how this works? Yes, they are smart to walk and you would too if your smart. Why stay? Screw the moral hazzard the banks and Congress have that sewed up already. They are just legally saving themselves from economic disaster. I say that is pretty damn smart when you consider the alternatives!!!

  18. Correct me on this please. Are these lenders on the web based list simply companies that have originated and closed these loans but no longer own them? This is what I am observing here. So the loan actually belongs to CFC for example and they arent interested.

    Keep up the great work MM. You make me look smart.

  19. J,

    The reason I said “morals aside” is to show that STRICTLY as a business decision, continuing to pay in that situation was foolish. And I never said the borrower was cheated. I think that the borrower does have a responsability to read the contract he signs and know what he is getting into. That really doesn’t matter though. The foreclosure laws in CA are set up to ensure banks require the borrowers have some skin in the game. If banks don’t require money down, they are putting themselves at great risk to have a default on their hands. It’s sort of like a no-fault policy in CA, regardless of who commited the fraud, the banks takes the financial hit, the borrower takes a credit hit, and they go their seperate ways. Simple as that. And you misspoke in your post above…”if the borrower was cheated, then it’s the bank’s problem”. No. It’s the bank’s problem no matter what the reason for the default. It just may not be their fault.

  20. It appears that the list of banks in the article, is nothing more than a group of mortgage brokers who signed up on the HUD website to offer the H4H program. Per HUD, the program is available to all, but only the big retail banks have jumped on board, and per the numbers, without much enthusiasm. I have yet to find a Wholesale lender that will offer the program. The program is doomed if we can’t get wholesale lenders on board. I have a list of borrowers who would benefit from the program if it were available now. Why are the wholesale lenders shunning this product? HUD says that the product is “too new” and that the retail lenders are going to “work the kinks out”. I want to help homeowners in my community now. Please advise.

  21. […] much-ballyhooed federal “Hope for Homeowners” program has been widely judged to be ineffectual and even counterproductive window dressing. Only a small fraction of those […]

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