Saturday July 19, 2008

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Results from Piecemeal Housing Plans Leave Doubts About Effectiveness

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Even as the House of Representatives passed two housing rescue bills and the Senate wrestles over a bill of its own, criticism is raining down on those remedies to the housing crisis that are already in place.

There are so many piecemeal plans operating such as Hope Now which is largely a product of many large mortgage servicers prodded into action by the Treasury Department; Project Lifeline, the increased dollar limit on conforming loans, dozens of state, local, and lender initiated programs, and so on, that it is hard to make any blanket assessment of performance, but a few initiatives stand out.

We have previously reported on Hope Now's shortfall in results with troubled homeowners. In recent testimony before the House Financial Services Committee Subcommittee on Housing and Community Opportunity, Julia Gordon of the Center for Responsible Lending stated that foreclosures outranked loan modifications by three to one among program participants and that the majority of the loss mitigation work being undertaken is unlikely to lead to continued home ownership. Ms. Gordon quotes the vice-chair of Washington Mutual who helps to run Hope Now as saying that many of the homeowners who have sought the program's assistance "will not receive long-term relief and could ultimately face higher costs."

As we noted here recently, the legislation to raise the ceiling on conventional loans so Fannie Mae and Freddie Mac can purchase more loans in expensive housing markets and FHA can insure the same has, so far, been a bust. Either the loans are not being offered by lenders or the premium interest rates and/or fees make them unappealing to borrowers.

The latest criticism is of FHA Secure. This program was originally expected to assist 60,000 delinquent borrowers and has, according to administration officials, assisted 150,000 people as of April. The catch is fewer than 2,000 of these homeowners were at risk of foreclosure. Most of the remainder who received help was homeowners who were making their mortgage payments on time.

FHA officials say that these people may have been anticipating problems in paying their mortgages and were able to head off trouble by participating in the program.

The New York Times quotes Senator Christopher J. Dodd (D-CT) as saying the program, while a good idea, "is not addressing the magnitude of the problem."

FHA Secure has undergone several modifications since it was initiated last August. Originally it was targeted at low-income homeowners who were delinquent on their mortgages because of interest rate increases on their adjustable rate mortgages. These borrowers, however, had to have been current on their mortgages prior to any interest rate increase. In April eligibility was broadened to include homeowners who fell behind in their obligations because of extenuating circumstances such as lost jobs or family illnesses even if their interest rates have not changed. Program officials estimated that this would allow an additional 100,000 people to refinance this year.

Borrowers who are otherwise eligible for the program must still have only missed two payments in the 12 months before they went into default which prevents homeowners who were on the fall-behind, catch-up, fall-behind merry-go-round, perhaps over the course of many months, from participating in the program.

Also under fire, not unexpectedly, are proposed new rules for regulating the mortgage industry.

The rules, designed to stop abuses by lenders, are in a mandatory comment period and have encountered many comments from bankers, mortgage brokers, and other industry players. The industry marshaled its forces and circled the wagons and has already pushed the Fed into narrowing the focus of the rules so that they apply to fewer loans.

The industry claims that because of the present tight credit situation, stronger rules would create more paperwork and expose lenders to more lawsuits, resulting in higher mortgage costs.

The proposed rules would require that mortgage companies show that its customers can realistically afford the mortgages they are offered; disclosing hidden fees often rolled into interest payments and prohibiting "misleading" advertising.

The Fed received more than 5,000 comments, mostly from industry representatives. Leading the protests are most of the usual suspects; the American Bankers Association, the Mortgage Brokers Association, and the Independent Community Bankers of America. The National Association of Home Builders and the National Association of Realtors are also protesting some parts of the new regulations.

Of course, there is also a contingent of commenters who feel that the regulations are too weak and further loosening of the rules would make them useless. Those advocating strengthening the rules include consumer groups such as the Center for Responsible Lending. Sheila Bair, head of the Federal Deposit Insurance Corporation wrote a letter urging that the rules be tightened as have senior members of the House Financial Services Committee.