Hope for Homeowners Program Not Yet Providing Much Hope

Nov 5th, 2008 @ 1:57 PM by Amber Nelson

A new government program designed to help homeowners avoid foreclosure is not attracting many takers at this point, according to the Federal Housing Administration and lenders around the country.

The program, Hope for Homeowners, is a Bush administration-led effort to help struggling mortgage borrowers refinance into FHA-backed loans with lower balances and possibly even lower interest rates. The end result for homeowners would be smaller payments and a partial recuperation of equity.

When the program began officially on Oct. 1, the FHA estimated that it could help as many as 400,000 borrowers stay out of foreclosure through 2011, yet new reports from the Administration show that there were less than 100 applications submitted in October. The FHA has revised its projections, now saying that the program will be able to help only 13,300 during the first year.

One reason the program does not seem to be working is that lenders and mortgage-backed securities investors do not profit much from participating. They must agree to take significant losses, writing down the value of the loan to 90 percent of the appraised value. In some cases this could mean a loss of more than $100,000.

What’s more, borrowers must pay a 3 percent FHA insurance premium at the outset of the refinanced loan, which most homeowners cannot afford to pay out of pocket. This fee gets rolled into the balance of the loan, requiring the lenders and investors to further write down such loans to only 87 percent of the value, meaning even more loss.

Hope for Homeowners loans are also unappealing to some lenders because borrowers will forfeit their claim on FHA insurance if they miss the first payment of their loan, something that is much more likely to happen with these desperate homeowners than with others. The risks are apparently outweighing the benefits for most lenders.

Struggling borrowers may also have reason to bypass the program. As the value of their homes appreciate in the future, they will have to share 50 percent of the equity with the government. Additionally they must pay a 1.5 percent yearly insurance premium, a rate that is triple that of a traditional FHA loan.

There may still be help from the government on the way, though as several new proposals are being discusses by the Bush administration, including a plan that would lower rates to 2.5 percent, allow borrowers to extend the life of their loans to 40 years, and potentially reduce the total mortgage balance.

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.

Posted in Mortgage Rates, Mortgage Refinancing, Mortgages
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