The Hope for Homeowners can save more properties from foreclosures if the Federal Housing Administration is able to pursue its plans of revising and expanding the $300-billion program to be able to help underwater homeowners.
According to federal reports, house prices in many areas of the country are down by about 30 percent from their peak prices in April 2006 and may put 42 percent of all borrowers in the country to negative equity levels.
If the program is retooled this year, it would be the third improvement effort on the Hope for Homeowners program, which was launched by the Bush administration in October 2008 and has saved only 96 homes out of the 400,000 homes originally targeted for rescue from becoming federal homes or bank-owned homes.
According to FHA Commissioner David Stevens, the Hope program is different from the Home Affordable Loan Modification Program because it focuses on reducing principal loan balances and wiping out home equity loans or second liens, resulting into much lower monthly home loan payments.
Lenders who participate in the program and who wipes out home equity debts are paid by the FHA between three cents and 50 cents per dollar forgiven. Compared to the HAMP, investors are usually paid from four cents to 12 cents per dollar forgiven. Lenders are expected to choose this option and save properties from foreclosures and from government tax foreclosures in cases where investors get nothing when the properties are underwater and ultimately foreclosed.
Karen Weaver, chief of securitization research at New York-based Deutsche Bank Securities, said the federal government has to find a way to reduce principal balances because of the rapidly rising percentage of underwater borrowers.
With the high redefault rate among homeowners whose loans have been modified, Weaver said that the government should realize that the HAMP scheme is not working because modifications have not been resulting in significantly reduced payments.
Treasury Department officials themselves reported that less than ten percent of modified loans involved principal reductions. Most were modified by interest deferrals only.
Bose George, analyst at Keefer Bruyette and Woods, said that deferrals are not enough for underwater borrowers. This is shown in the low percentage of modifications that have been made permanent as of December last year.
Of the nearly 800,000 trial modifications approved by lenders, only 66,465 homeowners received permanent modifications and saved their properties from foreclosures.