Homeowners not applying for federal program offering refinancing

Originally, this post was referring to an AP story about more companies lining up for a piece of the bailout fund. But alas, hidden within that story was a little treasure about the HOPE for Homeowners program passed by Congress in October to help those at risk of foreclosure or default refinance their debt and stay in their home.

Like all federal programs that hand out dollars to states, municipalities or individuals, strings are attached. Maybe that’s why only 312 applications for the program have been received.

The program was designed to help as many as 400,000 homeowners by offering them the ability to swap out their “risky” adjustable rate mortgages for a 30 or 40 year fixed rate deal. If you were having trouble making your payments, this program was for you.

I can not even begin to count all of the reasons people did not like the program, but I guess if you were in a situation where your payments were getting out of hand and you wanted to stay in your home, you’d take a look.

The HOPE for Homeowners (H4H) program allows homeowners, councilors and originating lenders to tap into a program to refinance debt as long as a few conditions are met.

Note the program is voluntary, and vailable through US Department of Housing and Urban Development (HUD) approved lenders. Banks are not required to participate in the program.

Here is the deal for the current homeowner. The mortgage is refinanced at 96.5 percent of the current appraised value of the home; the refinance automatically provides 3.5 percent equity. So if you are upside down, the program wipes out your obligation above the current value of the home.

On top of that, the mortgage finance amount is only 90 percent of the adjusted appraised value.

The FHA lender takes a loss on the difference between the existing loan and the new loan, and homeowners will need to go through the loan approval process like they should, but the real highlight of the program is the shared equity part of the deal.

The Federal Housing Administration (FHA) gets a chunk of all future equity, above the financed principle. That’s right, the federal government is part owner of your house.

Here is an example of how the equity sharing works directly from the HUD Web site.

Appraised Value – $200,000
Financed Amount – $180,000 (90 percent)
Initial Automatic Equity – $20,000

If you sell or refinance your home within the first five years, the FHA takes a declining share of the total equity, but after five years, and into the future, you and the FHA split the profits.

So yes, if that $200,000 home is sold 20 years from now at $400,000 (as an example), the FHA’s take is $105,000.

Gee, maybe that’s why the program is not taking off? How would you feel about the FHA, a division of the HUD, owning a chunk of your future equity?

For background, SFGate.com highlighted the program on Oct. 2 with additional details.

16 replies
  1. Dimsdale
    Dimsdale says:

    Is there anything that the Democrats (and some Republicans) don't want to socialize?

    I always wondered what it would be like to live in a banana republic. Now I understand the meaning of those Che Guevara posters that used to adorn the walls of Obama election headquarters….

  2. Robert
    Robert says:

    The author of this article doesn't have a clue, were on approved hope for homeowners lender list. We get 200 phone calls a day for people in trouble who want help and would participate in the program. Unfortunately not 1 lender will purchase these loans. Why because their investors won't let them write down the loans to 97% loan to value.

    Also if the customer has a first payment default there is no FHA insurance for the lender. This has zero, nothing to do with customers not liking the program. Next time do some homework. Call any of the participating lenders on the hud.gov web page for hope for homeowners and you will get the same response.

  3. Steve
    Steve says:

    When I mention the number 312, those are applications, not approved, done deals.

    200 calls per day? Why are they not applying for the program? Why are they not trying? Maybe they should be renters instead of owners and do not qualify to hold a mortgage even at the reduce home price?

    Playing devil's advocate here… If I am a lender and the borrower is about to default, I'm going to loose money. I have some choices, foreclose and sell the property at a loss, or foreclose and hold the property, pay expenses and hope to sell the property later and make back some of the loss.

    Why not refinance – if the borrower is a good risk – and as part of the FHA program take half of the future profits? That is why the FHA lender would do this, they get half of future equity.

    At least that is my understanding, the lender takes a hit up front and takes a chance that equity would improve and they would get half that equity when the house is sold.

    On top of that, the FHA is backing the program – government insurance for the lender.

  4. Robert
    Robert says:

    They all have applications in with us and the fha automated program DU has approved them for credit. What your missing here is that there is no secondary market for the loans, no one wants to buy what is perceived as a toxic mortgage. None of the lenders are buying these loans either.
    I agree with you a short sale is more expensive, foreclosure is more expensive. At this point customers don't care about the gov't getting 50% of the profits, maybe that will change later. They want to stay in their homes. The Gov't also just announced the FHA secure program has been terminated officially at the end of 2008.

    We have gone around the program and asked lenders for a short payoff and were getting 25% to say yes. They are voluntarily lowering their payoff to 90% loan to value so we can go get the customer a new loan without all the Gov't red tape and profit sharing, it's frankly all we can do for an underwater mortagage.

    80% of all these customers want help, but who will buy the loans? Not countrywide, wells, citi, chase, bank of america. They are giving lip service to congress about doing them internally if they qualify. Thats why you only have 312 applications. I have 600 in my office alone but I can't sell them. And my warehouse provider will only let me keep a loan on my warehouse line for 60 days.
    Here is the problem, the banks investors won't take the loss because the bank guaranteed the loan principle. The investor has no motivation to take a loss, the bank can't take the loss because it needs to replace any loss with capital equal to the total original loan balance. Once a bank modifies a loan it has to take that amount of capital off the books and replace it with a like amount. The banks need the capital to cover existing losses which is why their not lending. The banks will need another $7 billion before this is all over just to cover losses. which is why nothing is being done.

    Congress is going to have to legislate to protect the banks or agree to cover the losses by investors or a portion of the losses. Fha is going to have to get rid of the 3% premium plus the 1.5% you have to have upfront for this program. Also they currently require the customer to come up with all the closing costs. Are they on crack? If the customer had 5k laying around they wouldn't need this program would they.

  5. Wyndeward
    Wyndeward says:

    First, Robert, don't double post… it's tacky.

    Second, *WHY* would anyone investor want to buy these cockamamie loans? Damaged goods require an enthusiastic mark-down. People don't get into business to lose money… and you can take that one to the bank!

  6. Robert
    Robert says:

    I didn't mean to double post I was trying to edit the first posting and it double posted. You want these loans because you have to keep people in their homes. This is not a philosophical question, if all our cities start looking lock stockton Ca (the foreclosure capital of america then you won't have to worry about your home having any equity in it for several years. Also the Gov't is guaranteeing the loans. However if you read my post you would understand there is a catch 22. The banks don't have the money to lend. They took the tarp money to cover losses. So unless the Gov't legislates to protect the banks from being sued by the investors none of this will matter and at 9% unemployment and no credit available you can figure out pretty quickly where we are heading. Not quite 1930 but as close as it comes. If it can be prevented it should be. But were way past having academic conversations, watch and read any of the data and were still no where near the bottom. What everyone is missing here is that self employed people can't buy homes for the most part. If they put down 20% they write off all their income and have nothing left on paper to qualify with. The no income qualifying loans are not gone, how would anyone qualify now for new credit? Were still only about halfway through this deleveraging process. Hope for Homeowners program would at least create something for the middle class while the banks hoarde their cash.

  7. Wyndeward
    Wyndeward says:

    Perhaps I was unclear — what *business* reason would there be for a business to buy one of these cockamamie loans.

    And, perhaps, you weren't paying attention — the government has been handing money out to the banks hand over fist, priming the pump with a fire-hose. The banks are strangely silent on what they're doing with this money, but it obviously isn't lending.

    I repeat — businesses do not form as charities or to lose money. The stats tell us that most of the non-performing loans that get "fixed" come unglued again in short order. I can fully understand why the banks are leery of jumping back in, given the results of the FM2 follies.

  8. Robert
    Robert says:

    Well I was paying attention, unfortunately it's quite obvious to me that your not a participant in the financial services industry. Why do I say that because your not informed. Yes your right there is 10 firehoses with the nozel wide open. What you don't understand is that the banks have losses they have to cover, I have said this twice now please pay attention. They don't have money to lend if they are needing the money to lend.
    The TARP money is just the start mark my words you will see at least two more Tarps before were done. And Mr. Pay attention, what do you think the Fed has done with it's 2 trillion dollars that it won't disclose where the money went?? Get off 1st base and get to 2nd were gonna have a test when I'm done. What you don't get and most don't is a little instrument called a credit default swap, it's insurance or Faux insurance that has been sold over and over. (google it) that is why you and me the tax payer are having to bail out King Henry and his entourage. Yet guys like you are sheep , don't see the big picture or the fact that the tax payer is getting nothing while bailing out wall street.

    I am not asking or suggesting for one minute that an institution that didn't ask for a bailout should participate in the H4H program. I am suggesting that those who did get bailout money be mandated to participate because we the people are bailing them out and we need to be bailed out as well. The Govt was going to initially buy bad loans from the banks anyway right,?

    So why are people like you not railing against the banks who would otherwise be out of business if we used your logic about charities and railing against the tax payer who is paying the bill to bail out the institutions who made bad decisions.

    So whats it going to be Socialism for all or just the banks?? Ohh yeah I forgot it's all business when banks don't want to lend but it's our responsibility to bail out the same guy who won't lend to us. Yeahhhh I'm with ya now great logic.

  9. Robert
    Robert says:

    I forgot to answer your question on the current modifications that are going back into default.

    If you investigate on your own instead of reading headlines you would know that the president of the community reinvestment fund has said the following and it only makes to much sense. Thes modifications fail because banks do two things they want to get you caught up on your payments and or reduce the payments only . They don't evaluate the customers ability to repay the loan they just want their money. I own a non profit loss Mitigation company and what were seeing is the above in addition what Ben Bernanke said and many agree. If your not going to do any principle reduction on a loan and the borrower is $100,000 upside down on his mortgage the ether will wear off and they will go rent or default. The banks don't do mods to keep people in their homes they are a collection dept for the banks only. Just google Ben Bernanke and loan modification.

    He also strongly backs the H4H program as does Sheila Bair and Obama. Watch and wait 45-60 days for legislation to force banks who took bailout money to participate. It's the way it should be. If you get bailed out then you should also do some bailing out of your own.

  10. Wyndeward
    Wyndeward says:

    For all your posturing, you still haven't answered my question — what business reason would an investor have to buy one of these loans?

    You rail on how they should be made to buy them, but you have yet to conjure of a serious business case for the banks to actually purchase one. You shout a lot, talk a little inside baseball, but ultimately, you don't answer the question.

    You say that the FHA software says make the loan, but the markets don't want to buy the loans. Given the FM2 follies, color me unsurprised. The software told them to make the loans on the front-side of this problem, too… and the bankers who bought those loans found themselves on the short end of the stick.

    So, Bobby — other than getting these loans out of your "loan warehouse," what business reason would a bank have to buy these loans? Banks aren't in the business of losing money, which you would appear to be advocating. Banks also, generally speaking, aren't in the business of keeping folks who over-borrowed or made poor personal financing choices in their houses — they don't like bankruptcies and would prefer everyone paid their bills on time, but bankruptcies are a fact of life.

    The FM2 follies took a great many folks who really shouldn't have gotten loans of the size they obtained and put them in houses they couldn't afford. This is the inevitable fallout of "pie-in-the-sky" thinking that interests rates would never go up, housing prices would never go down and that if the house-payment got to be too much of a burden, y'all could just flip the house, pay of the note and pocket the appreciation. I've heard folks interviewed who said the didn't know that an "adjustable rate mortgage" meant the rate of the mortgage would adjust.

    From your post, you sound as if you want to follow Barney Frank into the socialized housing business and continue to make the banks lend money to folks who have already shown a lack of judgment and an inability to pay back the bank. Sounds to me like good money after bad. And getting the gov't to force banks to throw good money after bad sounds a hell of a lot like fascism — corporations doing what the government "suggests" at the barrel of the proverbial gun.

  11. Robert
    Robert says:

    You talk as a free market capitalist who obviously has no problems with capitalism when Banks and wall street are bailed out by the tax payer. You conveniently skirted my major point, which is why are you not railing against the banks who took bailout money as a free market capitalist??? I think that is something you have avoided for 3 postings now and I don't understand why you can't address the question?

    You say Barney Frank, yet you had no problem with King Henry Paulson bailing out his entourage. I am a Republican, however I am also a Pragmatist. In normal times you let banks fail. In these times you don't, however what I am hearing you say is that the Golden Rule shouldn't apply here and I don't hear why. The tax payer has the Gold and should make the rules. You won't have to worry about big business or free market capitalism if the financial system fails. I agree, what I hear is a Hypocrite here. If the consumer made a bad decision let him fail, if the banks make poor decisions we need to bail them out is that about right? If you have the strength of your convictions you should have an arguement as to why your not for letting the same banks fail as you are the same homeowner.

    Of course you have many people who should not have bought homes and no program will help them. I agree. What your missing is there are 20% of all applicants who would otherwise qualify for a mortgage except their upside down and have negative equity. 700 credit score good job, but will walk away because the harsh reality is they don't see the light at the end of the tunnel. If your $100,000 upside down your trapped and even Suze Orman has said publicly to walk away take the hit to your credit and wait the 4 years until you can apply for an FHA loan. The reason it's good for banks is these are good borrowers. Not to be confused with Subprime borrowers who for the most part didn't need to show any income documentation for these loans, and never had an fha software approval.

    The Author of this Blog has some great points, why is an investor willing to take a much bigger loss with a short sale then they are to keep the people in their homes? They pay for realtor commissions back taxes and liens on the property, closing costs and of course most buyers are not paying market value.

    For some reason if you sell your home the bank will write off 30% more than they would if they just reduced the principle to the current market value. Or participate in a program like H4H.

    The people running the banks are suppose to be making smart decisions for the investors however their not. Lastly if the bank does participate in the H4H program they don't have to do every loan, only those who qualify. I think I have given you more than a few reasons why banks should participate and or reduce principle. Now please tell me why your not for letting the same banks fail??? But are ok with the homeowner.?

  12. Wyndeward
    Wyndeward says:

    No, Bobby. I speak as a free market capitalist who thinks the government shouldn't have been in the mortgage business in the first place. Under FM/FM, we privatized profit and socialized losses. Paulson is a Dem, btw, doing what Dems do — socializing the market.

    Personally, I think no one should have done anything, going as far back as at least the Carter administration. I think the whole mess should have been left to sort out under the laws that exist, rather than this half-arsed bail-out program. Banks should have been allowed to fail, homes should have been foreclosed upon and the law as they stand be allowed to sort out the mess.

  13. Robert
    Robert says:

    Unfortunately Mr Wyndebag for all free market capitalist the screen door on the submarine has been opened by Mr. Bush and Mr. Paulson. I happen to agree with you however now that the door has been open all I am suggesting is that we the tax payers get something out of it before congress porks up the next bailout package which will come in the next 60 days. For free market capitalist you can thank wall street for screwing it up for everyone. Which we now come full circle back to the hope for homeowners program. Now that the Republicans Bush and Paulson and most of congress have voted for Socialism I have yet to hear a good arguement why bailing out wall street is better than bailing out mainstreet. This is the bottom line. If we have learned anything from History it's that we learn nothing from History. If you don't bail out the middle class by whatever means necessary you will have a deep recession if not a depression and no expert disagrees with this assessment. There is nothing that can be done to unwind the money already given to the banks, now it's time to have the banks help those who bailed them out with the H4h and other programs unless anyone has a better idea.

  14. Wyndeward
    Wyndeward says:

    Poor, Bobby… childish word play does not convince, especially when you have little basis in fact.

    For starters, Carter and Clinton pushed the mortgage problem, with a little help for "FOA" Dodd and "Let's err on the side of socialized housing" Frank. Bush and Paulson came late to the dance, but let us give credit where credit is due.

    Second, the largest problem with "getting something out of the bailout before its gone" is that it is going to train the sheeple out that there no matter how stupid you were to get into the mess that you're in, Momma Gov't is gonna be there to pick you up. Suckling up to the government teat is an invitation to serfdom, Bobby.

    As for bailing out anyone, there should be a large tax cut — let people keep more of their money, rather than the foolishness of taking it from some and giving it others. One idea being bandied about is a tax holiday.

    You never did answer — what business reason would a bank have to buy one of these cockamamie loans? The fact that you take the position that the gov't should put a gun to the head of the banks and make them buy the loans would seem to suggest that there *isn't* a good business reason to buy them and you'd prefer to go to a command-based system, where the government can command the banks to buy these new cockamamie loans to bail out the previous cockamamie loans.

    You work for a non-profit, you say?

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