No Hope for Homeowners? Foreclosure Prevention Program Falters

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

As of yesterday, 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 each in that 27 day period.

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

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 1990s.

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. 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.

Is it any wonder that the phones 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 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."

Disclosure:  I currently hold no positions in the stock market.

Comments

[Steven Hansen:]

let me see - we had a homebuyer who bought something he could not afford, and a lender who lent money to a homebuyer who could not afford to pay them back. now the plan is that the homeowner gets not only a better loan, but the loan value is reduced. the lender takes it in the shorts (no argument he should take it in the shorts) - and the homebuyer just plain gets something for nothing.

the problem in this scenario is that it is the surrounding homeowners who get hurt and pay for the mistakes of lender and homebuyer who defaults. no question the defaults must stop. how about a reconstitution of the homebuyers loan into a first and second where the first is a fixed loan at 80%, and the second is the remaining balance which stays with the house until repaid. the first then is a conventional loan while the second is resold to the government at cost. the second can be transferred to the next buyer upon payment of 1% per year of the value of the loan. hopefully, one day, the government will get its money back.

2008 Oct 28 05:45 AM

[Smalltownba...:]

The program is a disaster with a cost of credit almost 3% of above the current market rate for a loan. It is nothing but a government backed sub-prime mortgage that is doomed to the same failure as the one it replaces.

For the Hand> the homebuyer in the neighborhood benefited from the same artificial inflation of the value of the home which the government wants to force the lenders to write down. Why should the government step in to protect their value when it is just as artificial as the value given to the neighbor's property.

Let the bad loans made to people who can't afford them go the way they are destined to go eventually anyway. Let them fail. The market can then re-calculate the value of both homes. It is painful & it is distasteful but it is necessary and it is the fastest possible route to recovery.

2008 Oct 28 09:05 AM

[OrlandoRey:]

I work in the title insurance business. We looked at the Hope for Homeowners plan and came to much the same conclusion. Few lenders would be willing to create all new loan underwriting for a 1% loan origination fee to a borrower who is unlikely to make regular payments. The lender would also have to accept liability if the appriasal is wrong. Few borrowers would qualify and those that would might be better off negotaiting a deed in lieu or short sale rather than giving up half the future equity tin the home. Subordinate lien holders would have to voluntarily release their liens in exchange for a mortgage on part of the equity when the home is sold. Come on! Another government "solution." As hard as it is to take, we need to just let the market work this out.

2008 Oct 30 10:21 AM

[Kunst:]

If housing prices doubled because the money supply doubled -- and incomes would rise to match -- well, look at that, problem solved! No more underwater mortgages, mortgage payments half the percent of income, and yes, a housing boom.

Coming soon to an economy near you.

2008 Oct 31 12:36 AM