The Obama administration's latest foreclosure prevention plan got an A for effort from most observers, who said it targets the right group of borrowers — the unemployed and those whose mortgages exceed the value of their home.
But consumer groups and industry analysts alike said the proposed changes will do little to address a still cumbersome process, investor resistance and continued second-lien hurdles.
The plan is a "real paradigm shift in how they are approaching foreclosure prevention," said Julia Gordon, senior policy counsel for the Center for Responsible Lending. "But so far with the administration's efforts we've seen a real problem on the implementation side."
Many observers said they expect the plan will help only borrowers on the margins.
"I don't think it will have a huge impact unless it becomes mandatory," said Bruce Marks, chief executive of the Neighborhood Assistance Corp. of America. "I think you are going to see it increase [participation], but not enough as necessary until President Obama requires the servicers to do it."
Under the plan announced Friday, the administration's Home Affordable Mortgage Program (HAMP) will emphasize principal writedowns over interest rate and payment reductions. In order to participate, lenders must write down the loan by at least 10% and ensure the total loan-to-value ratio on the home is not greater than 115% after refinancing. Lenders will be able to refinance these borrowers into Federal Housing Administration (FHA) loans. To qualify, homeowners must be current, meet standard FHA underwriting guidelines and have a FICO score of at least 500.
The administration is also encouraging principal reductions directly through HAMP, pushing lenders to write down the loan to 115% loan-to-value. Lenders are required to consider borrowers who have already received a trial or permanent modification under the program. Servicers that choose to participate will receive incentive payments for any amount of the loan they forgive over three years — as long as the borrower remains current.
The administration is also targeting unemployed borrowers by calling for three-month forbearance on foreclosure proceedings against those borrowers who have recently lost their jobs. The administration will provide assistance to such borrowers for three to six months to help reduce a mortgage to 31% of the borrower's income based on their unemployment insurance.
Although many critics have said the administration's plan should have encouraged principal reduction from its inception, Michael Barr, Treasury assistant secretary for financial institutions, said Friday that lenders are only now more receptive to the idea.
"There is a change in attitude, perception among servicers and investors from a year ago," Barr said. "I think there is an increased recognition for doing principal-reduction plans."
Some observers argued the FHA changes could have a big impact — if the administration can implement it as designed. By refinancing into FHA-guaranteed loans, the lender is off the hook if the loan defaults again.
But they also noted Congress has tried this route before without much success. The Hope for Homeowners program, which at some point was projected to help hundreds of thousands refinance into FHA loans, has so far helped less than 50 people. "I remain skeptical of another FHA program," Gordon said. "This effort improves on [Hope for Homeowners], but it's still voluntary for the servicers to put the loans through."
The administration counters that it cannot make the program mandatory without further legislation. Although consumer groups continue to push a bill that would allow judges to modify mortgages in the bankruptcy process, the administration has offered the bill just tepid support.
"It's very hard to hold them to do this — legally what's necessary," Herb Allison, Treasury assistant secretary for financial stability, told reporters last week.
Stephen Ornstein, a partner at the law firm Sonnenschein Nath & Rosenthal, said that the latest program was an improvement but that he still worried it was not going far enough.
"There are still too many barriers to entry," he said. "You still have to qualify for FHA and even if you have a streamlined program it is still complicated."
Some critics also worried that the FHA's losses could rise. The agency has already experienced high losses on its loans, and many fear that it could push it further to the brink of insolvency. To that end, the administration said it would use $14 billion of Troubled Asset Relief Program funds — out of the $50 billion already devoted to foreclosure prevention — to absorb higher losses.
Investors are more optimistic about the plan's impact. Tom Deutsch, deputy executive director of the American Securitization Forum, said the program would be appealing to investors.
"Investors are very interested in the FHA short refi program," he said. "Severely underwater borrowers are very concerning to investors, so if they can take the pain up front and refinance it to an FHA loan, many investors will be willing to make that change. But there are operational challenges to that."
Howard Glaser, a housing consultant, agreed. "It has a much greater chance of success than anything they've done before," he said. "I think they understand the reality that you have to align mortgage debt and home values."
Still, some industry participants said the program remains cumbersome and confusing.
Diane Casey-Landry, senior executive vice president of the American Bankers Association, said many bankers are doing their own workout efforts which are more flexible than the administration's plan.
"It was a lot easier for the banks to operate outside of one of the structured programs," Casey-Landry said. "They see it as too limiting and structured around the borrower. What the bankers are saying is it doesn't allow you to address the unique circumstances of the borrowers."
Observers said the second-lien issue also remains a large impediment to workouts, even though the administration offered yet more incentives Friday for principal writedowns for such loans.
"The banks have tried to push out those losses as far in the future as possible and any government program that tries to get them to recognize that today the industry will fight," said Paul Miller, managing director of Friedman Billings Ramsey & Co.
Although lawmakers and an independent report sharply criticized the HAMP initiative last week, Barr said the administration is doing the best it can given shifts in the market. "We are trying to adjust to changing circumstance over time," he said. "We launched this program a year ago from scratch. … There have been growing pains in that program. "I think that we all think that we could have certainly done better."
Some said focusing on unemployed borrowers was a crucial first step toward repairing the program. "We are dealing with a very different reason for defaults today than a year ago," said John Courson, president and CEO of the Mortgage Bankers Association. "When you have 10% unemployment and the major cause of default is unemployment, you are not going to get the kind of modification numbers the administration was hoping for."