The Hope Hotline, Hope Alliance, and the Hope for Homeowners programs are doing so well at preventing foreclosures, the Bush Administration and the industry thought another weak voluntary program should be announced to confuse more people that they are really doing something to help. No word what this program is going to be be called — maybe they should just call it HOPE — as in Hope Obama’s Plans Evaporate. The announcement today was well in advance of the program even being finalized as the guidelines are not expected to come out until mid-December. Obviously the industry wants another press hit just before Christmas and the changing of the guard.
What are the nuts and bolts of this latest program?
1. Home loans only (the kind you cannot get help from a bankruptcy court in modifying unlike a second home mortgage or even a boat loan)
2. No bankruptcy (just to make it clear — the industry does not want anyone doing what they do when they have financial problems)
3. Must be 90 days past due (so people might skip payments to qualify, good policy incentive)
Then what? The servicer is supposed to work with the homeowner to modify the mortgage to:
- Change the interest rate (from really high, to merely predatory),
- Increase the term of the loan (e.g., increase the term to 40 years — a loan that will outlive the homeowner),
- Take part of the principle out of the amortization schedule and leave the homeowner with a balloon payment (not to worry, you’ll be dead by then, unless you have the nerve to refinance or sell your home before you die).
[There is no principal reduction (or "haircut"), only deferred principle, so people underwater do not have much of an incentive to stay.]
What is the target level of these modifications?
At the end of the modification, this new program wants the mortgage payments (including property taxes, insurance and HOA or condo payments) to be not more than 38 percent of the pre-tax income of the borrower.
This program is going to apply to mortgages held by Fannie and Freddie (known as the Government Sponsored Enterprises or GSEs, which is a misnomer at present because they are in the conservatorship of the federal government, thus should be called the Government Owned Now Enterprises or GONE). While GONE holds or secures half of the home loans out there, it might have a fifth of the troubled loans under its control so the impact of this new program is questionable. The government has merely enacted more guidelines (not regulations) and it “hopes” investors follow it so another government will not do anything that might actually work to solve the problem (e.g., give bankruptcy judges the ability to modify home loans).
To her credit, Sheila Bair, head of the FDIC, has already been critical of this program:
[The program] is a step in the right direction but falls short of what is needed. … Given continually rising foreclosures and their impact on the economy, we must address the need for appropriate economic incentives to prevent unnecessary foreclosures. … As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans.
Sheila Bair, FDIC, story here.
I almost forgot — servicers have also been given an incentive to help modify the GONE’s loans: $800 per modification. It is well documented that servicers have been part of the foreclosure problem even when the holders prefer more modifications simply because of the compensation structure (servicers made more money foreclosing instead of modifying). Unclear if the $800 will make a difference, but to ignore servicers will certainly prevent any voluntary program from working.