New Mortgage Relief Program Has Old Problems

Credit Union Journal
April 28, 2010 | COMMENTS

Analysts are suggesting that several key details are different, but the latest attempt to help underwater borrowers could run into some of the same fundamental problems that scuttled earlier efforts.

The Home Affordable Modification Program's most recent iteration would help borrowers who owe more than their homes are worth refinance their debt into Federal Housing Administration loans.

Lenders would have to write down a loan by at least 10% and ensure that the total loan-to-value ratio is not greater than 115% after refinancing, what insiders often call a short refinancing. To qualify, homeowners have to be current and must meet FHA underwriting guidelines.

Helping people refinance their housing debt on more manageable terms is an admirable goal, observers told American Banker, an affiliate of Credit Union Journal, but while banks say they agree with principal forgiveness in theory, in practice they all want someone else to take the hit.

For example, the Hope for Homeowners program, introduced in 2008, is now considered a dismal failure. It called for second liens to be wiped out. As another exhibit in the government's attempt to help homeowners, the new HAMP plan announced last week tries to spread the loss between banks that hold both the first and second liens. But it could shift the lion's share to the primary lender. And that may be its downfall, American Banker noted.

“I can't see why the first-lien holder would worsen their own position,” said A.W. Pickel, the president and chief executive of LenderOne Financial, an Overland Park, Kansas mortgage broker.

Many of the details must still be ironed out by FHA and the Department of Housing and Urban Development, but Pickel said that a key obstacle is that second liens could end up “in the money” after a refinancing because first-lien holders must write down principal to 97.75%. The second lien would be cut to no more than 17.25% but since the borrower was underwater, second-lien holders would be able to retain some stake after a refinancing, he said.

Unlike Hope for Homeowners, the FHA short refi program does not require that second liens be eliminated.

Despite numerous revisions, the Hope for Homeowners program failed, in part, because second-lien holders did not have enough incentives to participate in return for releasing their liens.

This time around, the incentives might be so generous for second-lien holders that first-lien investors could balk at participating, observers said.

Micah Green, who represents the Mortgage Investors Coalition, a group of 15 money management firms and hedge funds that have been lobbying the government for FHA short refis, said lenders will get servicing fees, additional compensation and new refinance business to drive origination volume.

“If this program is successful at attracting large-scale refinancing, it could generate significant refinancing volume for lending institutions,” said Green, a partner at the law firm Patton Boggs LLP.

But he acknowledged that first-lien investors are "concerned about execution risk."

“You can't ignore the priority of liens,” he told American Banker.

This article appeared at www.cujournal.com and is reprinted with permission.