During the previous administration FHA enacted a poorly conceived program entitled Hope for Homeowners. It was originally estimated that it would help up to 400,000 households in the United States. When all the dust was settled the program fell short by roughly 399,999. As pathetic as it might seem, the last time I saw numbers for the program there was literally one successful closing.
The Hope for Homeowners program - or Hoax for Homeowners as it is known internally - was based on some interesting assumptions. The first of these assumptions were that many consumers had been steered into programs that were inappropriate for them and had they been given the terms they should have been things would have worked out very differently for them. Specifically, the program targeted consumers that received adjustable rate mortgages (ARMs). The idea was that consumers were struggling with their payments because their rate had adjusted and they couldn't afford the modified payment. For anyone that knows even a small amount about ARMs, they would know that the rate adjusts based on whatever index the loan is tied to. And this is the first issue with the program - ARMs were not increasing.
The issue with the majority of households that were struggling two to three years ago is the same issue we face today - unemployment.
One of the other things about the program was that it required participating lenders to voluntarily reduce the principal balance of the loan in order to facilitate a closing. Second mortgage lenders were required to write off the entire amount of the second. The question we all asked then is the same question we ask now - why on earth would a lender agree to do this? It doesn't make any sense whatsoever.
Fast forward to a couple weeks ago. FHA has now released a new refinance program for underwater borrowers. No catchy name here. Once again, the new program calls for the existing lender to reduce principal on the existing loan sufficient to enable a new FHA loan of roughly 97%. The minimum principal reduction required is 10%. Once again, this makes no sense whatsoever.
Let's pretend that the opposite of everything that has happened is currently taking place. Rather than seeing their value shrink by 20% the average homeowner sees their value increase by the same amount. Would it be fair for the banks to add 20% to the balance of the loan? Or let's say that instead of dealing with consumers that are losing their jobs or making less income that everyone suddenly had an increase in wages of 50%. Would it make sense for lenders to be required to increase mortgage payments?
The new program that FHA has released is entirely dependent upon lenders voluntarily reducing principal balances. This is going to be another failure just as the first program was a failure. On top of the lack of motivation getting in the way, imagine a situation in which B of A is paying off a loan with Wells Fargo. Why on earth would Wells Fargo agree to reduce the balance of a loan so that their competitor could then take over the relationship with the consumer?
And, just to make things even better, by doing one of these mortgages consumers will have the same type of negative marks on their credit report that they would have by doing a short sale.
I understand that this represents an effort on the part of FHA to help homeowners that are currently struggling in this economy. However, it's doomed to fail