Snag for FHA Hope

From Realty Times of September 22, 2008

Washington Report: Snag for FHA Hope
by Kenneth R. Harney

Although Wall Street's woes got a lot of attention on Capitol Hill last week, so did the continuing crisis in home foreclosures.

Starting October 1, home owners who owe more on their mortgage than their property is worth may be able to qualify for new FHA "Hope" refinancings that cut their debt, lower their interest rates and help them start rebuilding equity.

Sounds like a great opportunity for hundreds of thousands of hard-pressed owners, but there's a huge potential snag: Their lenders and loan servicers have to agree to participate, and they may not.

Why? Because among other requirements, lenders and bond market owners of mortgages will have to agree to write down the balances due on the loans below current market values for the house -- in other words, they'd need to take immediate and sizable losses on those mortgages.

At a House financial services hearing last Wednesday, a top Bank of America executive, Michael Gross, said Congress may have unrealistic assumptions about how many lenders and investors will agree to participate in Hope refinancings.

"My biggest concern," said Gross, "is that expectations for (this) program might be too high."

Rather than booking instant losses many banks and bond investors might prefer to work out customized loan modifications with borrowers instead -- renegotiating loan balances, reducing monthly payments and even interest rates - without having to deal with FHA.

But Congressional critics like House financial services committee chairman Barney Frank say the banks have already been doing that -- and foreclosure rates are still rising in many markets.

Frank is threatening to make massive -- though as yet unspecified -- changes in the federal rules governing home mortgage servicing that would force lenders to be more responsive to borrowers stuck with underwater properties.

In the meantime, borrowers who believe they might benefit from a Hope refinancing, should start talking with their servicers to see whether there's a chance. The law expressly makes the decision voluntary for all financial institutions -- borrowers cannot compel them or take them to court to force their hands.

But Barney Frank's ominous warning to lenders just might get some banks' attention and soften their stances on taking part in the Hope program. At the very least, home owners who talk to their lenders about Hope refinancings could open the door to customized loan modifications that help them out of their jams.

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