Several key details are different, but the latest attempt to help underwater borrowers could run into some of the same fundamental problems that scuttled earlier efforts.
The Home Affordable Modification Program's most recent iteration would help borrowers who owe more than their homes are worth refinance their debt into Federal Housing Administration loans.
Lenders would have to write down a loan by at least 10% and ensure that the total loan-to-value ratio is not greater than 115% after refinancing, what insiders often call a short refinancing. To qualify, homeowners have to be current and must meet FHA underwriting guidelines.
Helping people refinance their housing debt on more manageable terms is an admirable goal, observers say, but while banks agree with principal forgiveness in theory, in practice they all want someone else to take the hit.
For example, the Hope for Homeowners program, introduced in 2008, is now considered a dismal failure. It called for second liens to be wiped out.
As another exhibit in the government's attempt to help homeowners, the new Hamp plan announced last week tries to spread the loss between banks that hold both the first and second liens. But it could shift the lion's share to the primary lender. And that may be its downfall.
"I can't see why the first-lien holder would worsen their own position," said A.W. Pickel, the president and chief executive of LenderOne Financial, an Overland Park, Kan., mortgage broker.
Many of the details must still be ironed out by FHA and the Department of Housing and Urban Development, but Pickel said that a key obstacle is that second liens could end up "in the money" after a refinancing because first-lien holders must write down principal to 97.75%. The second lien would be cut to no more than 17.25% but since the borrower was underwater, second-lien holders would be able to retain some stake after a refinancing, he said.
The FHA short refi program does not require, as Hope for Homeowners did, that second liens be eliminated.
Despite numerous revisions, the Hope for Homeowners program failed, in part, because second-lien holders did not have enough incentives to participate in return for releasing their liens.
This time around, the incentives might be so generous for second-lien holders that first-lien investors could balk at participating, observers said.
Micah Green, who represents the Mortgage Investors Coalition, a group of 15 money management firms and hedge funds that have been lobbying the government for FHA short refis, said lenders will get servicing fees, additional compensation and new refinance business to drive origination volume.
"If this program is successful at attracting large-scale refinancing, it could generate significant refinancing volume for lending institutions," said Green, a partner at the law firm Patton Boggs LLP.
But he acknowledged that first-lien investors are "concerned about execution risk."
"You can't ignore the priority of liens," he said.
At the same time, the program will entice more borrowers who have entered trial modifications but have failed to provide documentation to get permanent financing on the current market value of their home, he said.
Still, experts agree that this program, or something like it, is badly needed.
"Until we address the number of underwater loans, the economy probably won't recover," said Richard Andreano, also a partner at Patton Boggs. "People have been holding out hope that housing values would come back, and the realization now is that whenever values do come back, it will be a long time down the road, so let's take the hit now and move on."
Not all underwater borrowers who meet the criteria will be able to receive an FHA refinance loan.
To qualify, a borrower's monthly mortgage payment, including a second mortgage, cannot be greater than 31% of their income and the total debt-to-income ratio cannot exceed 50%. They also need FICO scores of at least 500.
Lenders said the FICO score was lowered largely because they had problems trying to qualify borrowers for the Hope for Homeowners program, whose FICO scores were below the 580 threshold.
The FHA short refi also is a big improvement over Hope for Homeowners because many borrowers would have faced a significant reduction in their equity and would have benefited from only half of the home's appreciation when the housing market recovered because second-lien holders would have received a share of the home's future appreciation.
Those requirements have been dropped from the new program.
Tom Deutsch, executive director of the American Securitization Forum, said there is still a risk factor because servicers will have trouble identifying which borrowers should receive a short refi.
"It still goes to the moral hazard question," Deutsch said. "If someone wants a principal writedown and is current, how can a servicer believe they would walk away? If the plan becomes widespread, there may be significant challenges to preventing borrowers from taking part."
Exacerbating the problem is that more than 11.3 million borrowers, or 24% of all properties with a first or second lien, were underwater at Dec. 31, according to First American CoreLogic.
Mortgage servicers have to determine whether a default is reasonably foreseeable in the future.
"It does appear to me to be somewhat difficult if you're asking that a borrower be current but the lender writes down principal to 10%," Pickel said.
Richard Cimino, the chief executive of iServe Servicing, an Irving, Texas, special servicer and subsidiary of National Asset Direct Inc., agreed that refinancing a current borrower can be tricky.
"I understand the philosophy that you want to reward the current borrower," he said. "I think the government is making every effort and pulling out all the stops to keep the foreclosure rate down until something could be developed as a take-out product, but I don't think there's anything out there, so it comes down to FHA."
"I just don't know if the lenders are on board," Cimino said.
