WASHINGTON — To coax more lenders to participate, the government on Wednesday said it would overhaul a program designed to help struggling borrowers stay in their homes.
The Hope for Homeowners program will require lenders to write down loans only to 96.5% of market value if the borrower's debt-to-income ratio is below 31%. For loans to higher debt-to-income borrowers, lenders would have to stick to the original writedown mandate of 87% to qualify.
HUD Secretary Steve Preston said his agency is also lengthening the amortization period for new loans and initiating a program to pay off second-lien holders.
Speaking at the National Press Club, Mr. Preston said the changes were necessary because the program — once considered a centerpiece of the government's efforts to fight foreclosures — has gotten few applications since it began operation on Oct. 1.
"The Hope for Homeowners program has seen very low participation," he said. "Because of strict guidelines and a number of unique and specialized requirements in the original law, few lenders have actually signed up, and few borrowers have submitted applications. Clearly, meaningful changes are needed."
The program has received fewer than 100 applications to date, none of which has yet been approved.
Though the law setting up the program, enacted in July, required relatively strict qualification guidelines, lawmakers gave a regulatory oversight board the power in the Oct. 3 rescue law to rework terms.
Though the agency offered no details, HUD said second-lien holders would be offered "an immediate payment in exchange for releasing their liens, to permit more borrowers access to the program."
Second liens have been seen as a key obstacle to many modifications since they are usually owned by different investors who have no economic incentive to agree to any alteration.
Mr. Preston said the payments were needed to entice second-lien holders to participate, though he cautioned that he expects the payments to be low.
"The payments are going to be de minimus — pennies on the dollar," he said. "Most of these second-lien holders don't have an expectation for a significant return, so I think we'll be able to do so at a relatively low cost."
Servicers could also extend a mortgage's term from 30 to 40 years. Lengthening the amortization period would reduce monthly payments enough to make loans more affordable to people who could not qualify otherwise.
The Hope for Homeowners program seeks to reduce foreclosures by reducing the principal on unaffordable mortgages and securing them with a Federal Housing Administration guarantee.
Though the plan was touted early on by many lawmakers, former regulators, and academics, as a chief way to establish a price floor in the housing market and stem the foreclosure surge, mortgage market participants said from the beginning that the size of the required writedown was too large.
Industry participants welcomed the changes in the program, particularly the reduction in the required writedown.
"This change should meaningfully improve participation," said Michael Paese, the global head of advocacy for the Securities Industry and Financial Markets Association, who played a key role in writing the legislation this year as a staff aide to House Financial Services Committee Chairman Barney Frank. "This was the appropriate level of [loan-to-value]. Another change that also could be meaningful is the confronting [of] the second-lien issue."
But at least one large stumbling block remains, industry observers said. Many have argued that lenders and servicers are holding off from participation in Hope for Homeowners because they think the government could soon offer a new, better loan modification program.
For example, Federal Deposit Insurance Corp. Chairman Sheila Bair has pushed a plan to offer loan guarantees to lenders that agree to undertake systematic loan modifications. "Until the industry has a better sense of all the options that are going to become available in the coming weeks and months, it's unlikely to lead to a surge in FHA rescue refinancings," said Jaret Seiberg, an analyst at Stanford Group Co.
But Mr. Preston took issue with the Bair plan Wednesday, saying he was concerned it would interfere with private-sector initiatives.
"One of the things we have to be careful not to do is to preempt moves that the private sector has already taken by agreeing to pay for" modifications, as through voluntary efforts with servicers, the government-sponsored enterprises, and Hope Now, he said.
"My biggest concern is stepping in front of the private sector and paying for [modifications] down the road," he said.
Other industry representatives also cited continued shortcomings in the FHA program.
Laurence Platt, a partner at K&L Gates, said the regulators have poorly defined how to treat a key issue like appreciation, making impossible the servicers' duty to guarantee they have satisfied federal and state consumer credit laws.
"The underlying loan documents remain a material impediment to growing the program. It is still not clear how to characterize the documents under applicable law," he said, "and HUD unfairly puts this risk on the lender."
Another industry lobbyist insisted that, despite improvements, FHA is still a cumbersome process for lenders. "It's still a very complicated program," said the lobbyist. "It could be a lot more burdensome to apply for a new loan than a mod program."
