WASHINGTON — The foreclosure prevention program that lawmakers expect to be up and running in October could take a year to become operational, the Department of Housing and Urban Development said Friday.
Regulations to implement the program that would let the Federal Housing Administration insure underwater mortgages are "absolutely totally unlikely" to be out by October, a spokesperson for HUD said Friday.
"It's a new program, it's a program with a large scope, and there's going to be a lot of input from the industry," said the spokesperson, who asked not to be identified by name. "And because of the board structure, there is going to have to be a lot of clearance procedures."
The comments brought an immediate — and angry — response from House Financial Services Committee Chairman Barney Frank, who asked lenders at a hearing Friday to stop foreclosing on homeowners until the program is up and running.
"The notion that this takes a normal bureaucratic response when you have this social and economic crisis is unacceptable. … That would be incompetence bordering on malfeasance," the Massachusetts Democrat said in an interview Friday. "I cannot believe that this would wait."
The program would be created by a housing bill the Senate was expected to pass Saturday. It would allow the FHA, which is run by HUD, to insure mortgages that exceed the value of a home after lenders and servicers wrote down the principal to 87% of the current market value.
The program is estimated to help 400,000 borrowers avoid foreclosure.
The necessary regulations would be written jointly by an oversight board made up of the heads of HUD, the Treasury Department, the Federal Reserve Board, and the Federal Deposit Insurance Corp.
Among other things, regulators must define the underwriting terms for participating in the program. Servicers have said the terms are essential for them to determine which borrowers would qualify.
Rep. Frank said that he expects those agencies to move quickly to ensure the program is operational as intended by Oct. 1.
"We are going to persuade them to change," he said. "The board is members of the administration, and … they don't have to wait to October to talk to each other."
But even if regulators move quickly, they are likely to follow the normal regulatory process, which requires public comment on proposals and then possible revisions. The HUD spokesperson said a proposal could be out "early next year" and finalized next summer.
A Treasury spokeswoman referred questions on the program to HUD.
The program is voluntary for lenders, and Rep. Frank held the hearing Friday to gauge their interest. But during the hearing, which featured representatives from Bank of America Corp. and Wells Fargo & Co., he threatened to restructure the mortgage servicing industry if lenders and servicers do not take advantage of the program.
"If we cannot get significant participation here because the structure of the industry is such that the servicers can't do what they tell us they are going to do, then count on myself and other members of this committee. … We will change that situation," Rep. Frank said.
He secured verbal assurances from B of A, Wells, and representatives of the American Bankers Association, the Mortgage Bankers Association, and the Hope Now alliance of servicers and lenders that they planned to use the program as much as possible.
But Rep. Frank also took steps to ensure that if servicers and lenders did not comply, he would know relatively quickly.
He asked Faith Schwartz, the executive director of Hope Now, to use his committee's staff to help her survey the entire servicing industry to gauge interest in the program. He said he would use that survey to hold servicers accountable. If the results did not match their promises, he would return with aggressive legislation early next year to compel more loan modifications.
Rep. Frank also asked industry representatives to alert him immediately to any problems, so that Congress could address them quickly.
"We've done the best we could think of to induce the holders of the loans … to take action to reduce foreclosure. We need you to tell us if you are going to take advantage of this," he said. "If you are not, why? If there are obstacles, tell us, and we will do what we can to remove those obstacles."
Rep. Frank also asked lenders to delay any foreclosures for borrowers who may qualify for the program. The original House version of the bill would have had the FHA refinancing program take effect immediately, but the Senate changed the effective date to keep budget costs down and make the program more politically acceptable.
"Don't have people be victims of a budgetary maneuver," Rep. Frank said. "You know this is going to become law. I would hope that no one would be foreclosed upon between now and October 1st who would qualify for this program had that effective date been immediate."
Though lawmakers have been touting the new FHA program as something that could help alleviate the housing crisis, a large unknown has been how many lenders would participate.
Michael Gross, B of A's managing director of loan administration and loss mitigation, told Rep. Frank during the hearing that the Charlotte company has already begun reviewing potential candidates for the FHA refinancing program, but it would need to see the final regulation from the agencies before having a clear sense of how many borrowers would be eligible.
"Once the oversight board has published their final regulations, it is our intent to immediately take those final regulations and analyze our at-risk portfolios, and any borrower who is in the foreclosure process that we believe will be eligible for this refinancing program, we will be getting in touch with them immediately," Mr. Gross said.
Mary Coffin, the executive vice president of Wells Fargo Home Mortgage Servicing, which services one out of eight mortgages in the country, told lawmakers that her company also plans to use the refinancing program that the House passed Wednesday.
Wells is already trying to gauge who would be eligible, Ms. Coffin said. "We have been analyzing, working through our portfolios, trying to find the borrowers who look like they would qualify for the program," she said. "We have yet to speak to the borrowers, because what is required is a new debt-to-income ratio, so we need to understand all their other debt and liquidity to see if they fully qualify for the program."
When Rep. Brad Sherman, D-Calif., tried to get her to guess whether Wells could use the program to help tens of thousands or hundreds of thousands of borrowers, Ms. Coffin said she could not speculate.
"I don't know that I could give you a number," she said.