Whatever Happened to The Hope For Homeowners Financial Package?

Given the economic events of the last 8 weeks, July 2008 seems like another lifetime ago.  However, before there was the Economic Stability Act of 2008 (EESA), the Troubled Asset Relief Program (TARP), and all of the other government acronyms that have attempted to save us from economic ruin, the U.S. government passed the Hope for Homeowners Act (H4H).

H4H was designed to assist homeowners at risk of foreclosure with refinancing their mortgages into 30-year fixed rate mortgages insured by the Federal Housing Administration.  The program was expected to support the refinancing of loans up to an aggregate value of $300 billion.  Remember when $300 billion seemed like such a large number? Ah, the good old days!  Anyway, the government estimated that between 300,000 to 400,000 homes may be saved from foreclosure through the program.

One of the catches was that the lender had to volunteer to participate in the program.  Lenders that wish to participate must be willing to accept buyouts of their loans that will provide the lender with 90% or less of the current appraised value of the home.  The government expects that lenders would rather participate in the program and take a minimum 10-percent loss on their defaulted loans than absorb the costs of foreclosure.

One reason why we have not heard much about the program lately, other than the fact that the headlines have been usurped by the credit crisis, is that the program was not set to begin until October 1, 2008.  The program did begin on that date.  According to the bi-weekly Bi-weekly FHA operational data released on October 31, 2008, for the Oct. 1 though 15 reporting period, just 42 mortgage applications were filed under the H4H program during the period and none were endorsed.  Diana Golobay at HousingWire.com examines why the program may not be successful.  Among the answers offered by Ms. Golobay’s article is another look at the difficulty of the mortgage situation because mortgages have been sold to third-party investors:

The problem, however, may not be lenders, who say they’re more than willing to begin processing the loans. Instead, the problem sits with third-party investors that have thus far proven unwilling to take the minimum 10 percent haircut required to put borrowers into the program, plus an upfront premium payment–losses are actually far greater for investors who participate, given that the 10 percent figure is based on a current appraisal, and not original LTV.

It is important that the government continue to attack the fundamental problems in the housing market.  Our current economic crisis began with a real estate bubble and home-mortgage defaults, and thus, there can be no end to the crisis until mortgage defaults and, by extension, residential real estate prices find some firm ground.  Some economists, including Luigi Zingales of The University of Chicago, offer solutions in this article at The Economist.