About Government Refinance and Home Purchase Programs

In what appears to be a growing trend, JP Morgan Chase (including its subsidiaries WAMU and EMC) recently announced it is expanding its loan modification program. In a recent press release the company said the following:

Chase announced today that it has extended its mortgage modification efforts to the investor-owned loans that it services — about $1.1 trillion of loans — significantly expanding the reach and effectiveness of its previously announced mortgage modification efforts. This effort includes investor-owned mortgages held in securitizations.

“When homes are foreclosed, everybody suffers, so working aggressively to modify all loans -whether owned by Chase or owned by others – on terms that should work for the borrower, makes good sense for everyone,” he said. “Our experience at Chase has shown that when mortgages are properly modified, using income verification and other appropriate criteria, they perform very well over time.”

This is welcome news for struggling homeowners who are delinquent on their mortgages. While the government programs are a great fit for homeowners who have not fallen behind on mortgage payments, loan modifications are currently the only solution for people who are more than 30 days delinquent.

As we have noted, the original Hope For Homeowners program signed in to law last summer proved to be a spectacular failure. The question now is if the program will just fade away or if the incoming chief of HUD in the Obama administration, Shaun Donovan, will try to revive it. Here is a quote from him in a recent Reuters news piece:

HUD has been roundly criticized for its implementation of a mortgage refinance program called Hope for Homeowners that was conceived this summer to rescue 400,000 troubled borrowers but has retooled fewer than a thousand loans.

“I think it’s clear to everyone that there needs to be some changes to make sure that program is effective,” Donovan said.

Doesn’t sound like a commitment one way or the other to me. We shall see I suppose.

The Fed is making good on its promise to purchase mortgage backed securities. According to this article more than $10 billion in such securities were purchased in the first week of January. The program is having the desired effect as well — mortgage rates remain very low. All good news to folks looking to purchase a home or refinance into a better rate.

Here is an excerpt from the article:

The Federal Reserve Bank of New York said it bought $10.2 billion in mortgage-backed securities this week as it launched a program to lower home borrowing costs.

The purchases are part of a $500 billion program announced by the central bank in November as a way to help stabilize the U.S. housing market, which has entered its third year of a downturn. The MBS — issued by Fannie Mae, Freddie Mac and Ginnie Mae — have rallied since the Fed announcement, sending yields that influence consumer rates sharply lower.

The average fixed 30-year mortgage rate dropped for a 10th consecutive week as of Thursday, to 5.01 percent, the lowest since at least 1971, according to a Freddie Mac survey.

Several months ago a homeowner in Southern California contacted us for some guidance. Her family was deeply upside down on their home, with the first and second mortgage adding up to more than $100,000 greater than the current value of the property. Initially we were hoping that the Hope For Homeowners programs would be a success and help the family out. But this fall it was becoming apparent that H4H was a flop so we recommended she proceed with trying to get a loan modification with her current lender.

Well things apparently worked out. We learned a few days ago that her current lender offered her a 5 year interest only loan at less than 4%. That significantly reduces the family’s payments for the next five years and keeps them in the home.

Why would a bank offer such a program? Well in this situation it makes good business sense. The bank knows that if they did nothing the family might be forced to simply not pay at all. That would likely lead to a a foreclosure in 6-12 months. Foreclosures cost banks a lot of money in legal and administrative fees to begin with, and in this case the bank would only net a home that is worth $100,000+ less than they lent to begin with. Plus the bank runs the risk of vandalism and all sorts of other bad things if it tried to foreclose.

So the bank apparently decided it would better to keep the family in the home even at a very low interest rate. It is true that the family might not be able to make the pending higher payments in five years as well, but in that time the values of homes in the area could be back up again so foreclosing would make more sense if it came to that.

The good news is that banks seem to be coming around and seeing the light when it comes to loan modifications. The moral of the story is that if you are upside down on your home and can’t keep up with payments, and you don’t currently have an FHA or VA loan, your best option is to contact your current lender about a loan modification. (If you are upside down and have an FHA or VA loan now contact us about a streamline refi). With any luck stories like this one will soon be commonplace because as the housing market heals the US economy will follow.

You know you have a disaster of a program on your hands when things go far more poorly than even skeptics warned about. Such is the fate of the Hope For Homeowners program so far. To date the research shows that about 300 H4H loans have actually been applied for and 0 — yep, precisely zero — H4H loans have funded. That is a spectacular failure of a program. At this point the players involved in creating the program are mostly pointing fingers.

At least it gives the skeptics a moment to gloat. Witness this editorial piece over at the Washington Post.

There was an interesting story over at the Washington Post on the total disaster than is the Hope for Homeowners program. It looks like everyone is pointing fingers at this point. The problem is that the program was destined to fail from the start. The compromises that had to be made rendered the program completely inept (as we have been noting all along here). Here are some excerpts from the article:

Secretary of Housing and Urban Development Steve Preston said the centerpiece of the federal government’s effort to help struggling homeowners has been a failure and he’s blaming Congress.

Rep. Barney Frank (D-Mass.), who helped steer the HUD program through Congress, said some of the federal bailout money should be used to revamp it. Frank acknowledged the initiative has its problems, but he blamed them on the Bush administration.

For all those reasons, FHA Commissioner Brian Montgomery said he got an earful from agitated lenders, housing counselors and real estate agents at a seminar last month in Atlanta designed to educate housing professionals about the Hope for Homeowners program.

“What we thought would be a civil and cordial exchange with the several hundred people gathered turned into an almost rock-throwing episode,” Montgomery said.

He said Capitol Hill lawmakers were hampered by a philosophical divide within their ranks when they cobbled the program together and that led to a compromise that made little sense.

Speaker of the House Nancy Pelosi and House Finance committee chair Barney Frank are not happy with the way the first part of the $700B bailout fund has been spent. They are not inclined to release the second part until it goes more directly toward helping more Americans. Here is a recent article on that and here is an excerpt:

Frank has said he wants to revamp the Hope for Homeowners program in the Federal Housing Administration, which encourages lenders to forgive a portion of a homeowner’s debt in exchange for government insurance against default. Only 111 lenders applied to the program in October, its first month, and Frank has said he wants to lower the fees required for participation.

Frank also wants to fund a version of a plan promoted by Federal Deposit Insurance Corp. Chairman Sheila C. Bair to modify mortgages so that homeowners’ payments would amount to less than a third of their income. To entice lenders to go along with the plan, the federal government could insure some portion of the losses for borrowers who received help but still defaulted on their loans.

Some administration and Federal Reserve officials have raised questions about whether Bair’s proposal is the most effective way to help homeowners. In recent testimony before Congress, Federal Reserve Chairman Ben S. Bernanke said the government could end up paying vast amounts for homeowners whose home values have fallen substantially, suggesting that the underlying value of the property must also be considered, not just a borrower’s income level.

Paulson has said repeatedly that Bair’s plan and other proposals don’t do enough to distinguish between borrowers who could be helped to stay in their homes and those destined for default because their incomes and mortgages are hopelessly mismatched. Treasury officials also want to make sure President-elect Barack Obama is supportive before they adopt any plan.

President-elect Obama announced his nominee for the Secretary of Housing and Urban Development — Shaun Donovan. Here is the video of the announcement. The person who heads HUD will have a major impact on how much government help will be available to struggling homeowners over the next four years. HUD is the organization that manages both FHA and VA loans and HUD decides who qualifies and who does not. President-elect Obama said the following:

To stem the rising tide of foreclosures and strengthen our economy, I’ve asked my economic team to develop a bold plan that will dramatically increase the number of families who can stay in their homes. But this plan will only work with a comprehensive, coordinated federal effort to make it a reality. We need every part of our government working together — from the Treasury Department to the Federal Deposit Insurance Corporation, the agency that protects the money you’ve put in the bank. And few will be more essential to this effort than the Department of Housing and Urban Development.

In the end, expanding access to affordable housing isn’t just about caring for the least fortunate among us and strengthening our middle class — it’s about ending our housing mess, climbing out of our financial crisis, and putting our economy on the path to long-term growth and prosperity. And that is what Shaun and I will work to do together when I am President of the United States.

With any luck Mr. Donovan will come up with programs that will actually help the millions of Americans who are struggling to keep a roof over their heads.

As you may have already read at this site, FHA loans and VA loans have a process called “streamline refinances“. The great thing about streamline refinances is that as long as a borrower has remained current on their mortgage they can refinance to a lower rate with better terms even when they a underwater/upside down on their property (read: owe more than the home is currently worth). The problem is that streamlines currently only apply to FHA and VA loans. But that may be changing. Here is a quote from a recent Bloomberg article:

If they refinance someone, rather than doing a loan mod, do they need a new appraisal if they already have the credit? Federal Housing Finance Agency Director James Lockhart told reporters after a speech in Washington today. “That’s an issue that’s being discussed. They’re looking at it.”

Streamline refinances only apply to rate-term refinances; not to cash out refinances. The logic is pretty simple — if a borrower can stay completely current at a 6.5% interest rate that borrower should be a safe bet at a 6% interest rate as well. But a major difference between FHA/VA loans and Fannie and Freddie loans is the mortgage insurance. With the former the government insures the loans and collects premiums and with the latter private mortgage insurance companies insure loans of more than 80% of the value of the home. Paul Jackson over at Housing Wire said this about that:

The kink here is that in the case of the FHA, the government has underwritten any insurance on the loan; in the case of the GSEs, any mortgage insurance is underwritten by a private party, and so ultimately the FHFA would be working with a number of PMI providers to implement a rate and term streamlined refinancing program. The question, of course, is whether it makes financial sense to permit streamlined refis during a time when property values are still falling rapidly.

We’ll see if this idea comes to fruition. It does sound like it might be a useful arrow in the quiver of the federal government as it battles this housing crisis. It won’t help people who have fallen behind on their mortgage already but it might prevent more people from falling behind in the future.

With the HOPE for Homeowners (H4H) program turning out to be a total flop so far the federal government is looking into other ways to stem the tide of home foreclosures in the US in an attempt the shore up the economy. One of those alternatives that has been in vogue in the recent month or two is to have the government give incentive to banks to offer loan modifications to borrowers in trouble. The idea as we understand it is that some taxpayer money would be set aside as insurance of sorts so that if borrowers still default after their loan is modified the government would help the banks with some of the costs associated with that. But a recent study is calling the wisdom of subsidizing loan modifications as as well. Here are some quotes from a recent CNNmoney.com article on the subject:

More than half of delinquent homeowners whose mortgages were modified earlier this year ended up redefaulting within six months, a top bank regulator said Monday.

Some 53% of borrowers with loans modified in the first three months of 2008 and 51% of those with loans modified in the second quarter could not keep up with payments within six months, according to U.S. Comptroller John Dugan, who spoke at a housing conference.

So if more than half of people who get a loan modification will default anyway some are asking if taxpayer money should be used at all in this process.

There are a couple of things to keep in mind with these numbers.

1. Defaulting only means that the homeowner has at least one late payment on the mortgage. We should not confuse “default” with “foreclose”. The number of people who will actually have to foreclose is likely a small fraction of that 53%.
2. We have no data on the type of loan modifications that were given in this study. In many cases banks have given modifications that were only slightly better than the original loan so the lender took what they could get even though it was not enough. This would not be allowed for government backed modification programs.

So while the numbers look bad on the surface, we need to be sure we are looking below the surface as well.

Here are some more quotes from the article on the plan backed by Sheila Bair, head of the FDIC:

Modifications that include an interest rate reduction have a 15% redefault rate, said Bair, citing a recent Credit Suisse study.

Last month, Bair unveiled a plan to address the foreclosure crisis by modifying loans to as low as 31% of a borrower’s gross monthly income. This could be done by setting interest rates to as low as 3% or extending loan terms to 40 years. Principal could also be deferred free of interest to the end of the loan.

To entice servicers and investors to participate, Bair’s plan calls for the government would share up to 50% of losses should the loan redefault. But that guarantee only kicks in after the borrower has made six monthly payments to better ensure the mortgage modification is sustainable long-term. It would cost $24.4 billion, which Bair has said could come from the rescue funds.

In an address last week Fed Chairman Ben Bernanke stated the obvious: That until the wave of home foreclosures in the US can be stemmed the US economy will continue to stall. Here are some quotes from an AP article on the subject:

Lenders appear to be on track to initiate 2.25 million foreclosures this year, up from an average annual pace of less than 1 million during the pre-crisis period, he said.

Bernanke mentioned four possible solutions (all of which require tax-payer supported funding).

1. Fix the broken Hope For Homeowners (H4H) program. This program, approved over the summer and launched October 1 of this year has been an absolute flop so far. It is voluntary on the part of banks and banks have no incentive to participate right now. Here is a quote on that:

Bernanke suggested Congress lower the lender’s upfront insurance premium as well as reducing the interest rate borrowers pay, which presently is quite high, roughly 8 percent. To bring down this interest rate, Treasury could buy Ginnie Mae securities, which fund the mortgage program, or Congress could decide to subsidize the rate.

1a. Or this variation on the H4H theme was also floated:

Yet another option would have the government purchase delinquent or at-risk mortgages in bulk and then refinance them into the “Hope for Homeowners” or another government program that insures home mortgages.

2. The FDIC-style subsidized loan modification plan. This approach is designed to give the banks incentive to modify terms on loans to keep at-rick families in the homes:

The FDIC put this plan into effect at IndyMac Bank, a large savings and loan that failed earlier this year, and has used it to modify mortgages at other financial institutions.

Under the so-called IndyMac plan, struggling home borrowers pay interest rates of about 3 percent for five years. Rates are reduced so that borrowers aren’t paying more than 38 percent of their pretax income on housing. Bernanke suggested this threshold could be lowered to perhaps 31 percent of income, with the government sharing some of the cost.

We also get this from the article:

The Fed chief’s remarks come as the Treasury Department weighs new plans to revive the moribund housing market.

Under one plan backed by the financial industry, Treasury would seek to lower the rate on a 30-year mortgages to 4.5 percent by purchasing mortgage-backed securities from Fannie Mae and Freddie Mac. It’s unclear exactly how much the plan would cost. It is possible that Paulson will ask Congress for the second $350 billion installment of the $700 billion financial bailout package to bankroll the effort.

But while lower interest rates are great for people who can qualify for a loan, they don’t help people facing foreclosure:

“Getting mortgage rates down is … positive, but it doesn’t help people that currently have unaffordable mortgages because it doesn’t help them refinance,” said FDIC chief Sheila Bair. “Low interest rates help some consumers, but the ones that really need help and can’t refinance are not helped.”

It is pretty clear that President-elect Obama is committed to preventing more foreclosures so expect at least some of the ideas being floated to be put into action in the coming months.

The intervention of the Fed last week caused mortgage rates to drop dramatically. It is now very possible to get an FHA or VA loan with an interest rate of 5.5% if conditions are right. Only a week ago the same borrower who can now get a 5.5% loan would have been looking at a rate of 6.25%+. But will these low rates last? Reports are coming out of a plan being circulated that might lower interest rates for for a sustained period in an effort to stabilize to sinking housing market and give more people incentive to buy homes. Here is a report on that idea over at the Wall Street Journal. And here is a quote from Treasury Secretary Hank Paulson on the subject:

“The most important thing we can do to mitigate foreclosures and progress through the housing correction,” Mr. Paulson said in a speech Monday, “is to reduce the cost of mortgage finance, so more families can afford to buy a home and so homeowners can refinance into more affordable mortgages.”