Hope For Homeowners Program Is A Complete Failure

Many people were excited about the Hope for Homeowners program that was recently rolled out to help curb the growing number of foreclosures, and keep people in their homes. Unfortunately, as Anthony Freed points out in his blog post on Your Mortgage or Your Life, things did not quite turn out as planned.

As banks continue to line up for the taxpayer funded handouts designed to ease their withdrawals from years of dependence on high yields derived from ridiculously reckless lending practices, homeowners continue to seek avenues to prevent the looming possibility of foreclosure - typically cited as the root cause of the economic ‘crisis’ that currently grips world financial markets.

It’s reassuring to know that our dedicated civil servants are willing to put in the long hours required, on nights and weekends, to make sure their banking buddies and colleagues don’t have to suffer the same fate as many banking executives of late, having to retire with hundreds of millions of dollars that were fraudulently paid out as options and bonuses as reward for investing long and naked, and exposing their companies to tremendous risks.

By the way - none of those profits from the ‘boom’ are being appropriated in order to reimburse those now failing companies, and none of that money is going to be recovered in order to soften the blow to taxpayers.

That money is considered to be lawful compensation for a job poorly done. What is on the table is just exactly how much more bonuses they should get before their companies are declared illiquid then subsequently sold off to the lone bidder for pennies on the dollar, and how much of the bailout money they will use to buy up competitors instead of lending it out as promised.

And for the lowly taxpayer on whose backs both the illicit corporate profits as well as the cost of the bailout are borne? What has this unprecedented dash to action by the bureaucrats, political appointees, and elected representatives of the people wrought in the way of sanctuary from the economic tempest that has engulfed their citizenry?

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.

Henry Paulson, former CEO of Goldman Sachs, was one of the major architects and proponents of the “self-regulating” banking model developed in the 1990’s.

Heavy deregulation and the elimination of the safety barriers that had existed between the retail banks and investment banks, as well as the experimental distribution of risk to world-wide markets through untested financial vehicles, led to the erosion of the credit markets.

This system, partially conceived and enthusiastically advocated by Paulson, directly led to the current financial crisis that threatens the first worldwide depression since the 1930’s.

Now, for better or worse, we have handed the job of fixing this mess to the very people most instrumental in it’s cause, namely Paulson.

Is it any wonder that the phones are ringing off the hooks as desperate homeowners look for help and scramble to avert financial ruin by refinancing out of predatory loans, and yet only 79 loans being made to save them nationwide?

If it is not for lack of a program, and if it is not for a lack of interest on the borrowers part, that only leaves the failure of the program to the usual culprits - the banks.

“We know the interest from the public is there, and the next question that can’t be answered yet is are the lenders going to do this?” says Bill Glavin, special assistant to the FHA commissioner, who notes that it generally takes at least 45 to 60 days to complete the process for a regular FHA loan.”

Well Bill, here is your answer from them banks: “No.”

This article has been reposted from Your Mortgage or Your Life. The full post can also be viewed on Your Mortgage or Your Life.