Since the housing collapse occurred back in 2007, Uncle Sam has been very aggressive about rolling out foreclosure prevention plans designed to help millions of struggling American homeowners. Not one of the programs comes close to the numbers the politicians claimed would benefit. In recent days, members of House of Representatives have introduced multiple that will end three of the foreclosure programs
- H.R. 830 seeks to end the Federal Housing Administration Refinance Program.
- H.R 836 calls for termination of the Emergency Homeowners' Relief Program. Initially passed in 1975, and designed to assist jobless homeowners pay their mortgages Congress approved $1 billion to fund the program for the first time.
- H.R. 839 terminates the Home Affordable Modification Program (HAMP), which provide incentives for mortgage lenders to work with Uncle Sam to modify the term of mortgages. However, about 600,000 have received modifications. On March 10, 2011, the House voted to eliminate this program.
The Home Affordable Refinance Program (HARP) helps borrowers underwater in their mortgages. Homeowners, current with their mortgage, can lower their mortgage payment by refinancing with Fannie Mae or Freddie Mac up to 125 percent of the homes’ value at the time of application. Thus far, only 622,000 homeowners with troubled mortgages, of the 4-5 million projected, have benefited from this program scheduled to expire in June 30, 2011.
On the surface the programs sounds good, but they on or more rules that doomed their success before their introduction to the public. Look at the Federal Housing Administration Refinance Program.
The FHA Short Refinance Option
Launched in the fall of 2010, this program targets owner-occupied borrowers with non-FHA home mortgage loans that evolved into underwater mortgages. Between, September and the end of November 2010, a shameful 61 applications resulted in one measly approval. These numbers sum up the insignificance of a program that should have had no problem exhausting its $8.12 billion funding -- 11.1 million Americans have upside down home mortgages.
This is the deal: underwater mortgage; lender writes off at least 10 percent of the principal; low home mortgage interest rate; and lower mortgage payments.
Yet, FHA Commissioner David Stevens reported, as of February 11, 2011, the program received 245 applications. The $50 million dispersed refinanced 44 approvals for an average of $1,136,363.00 per deal.
How the FHA Short Refinance Works
Home mortgage lenders would reduce the outstanding loan balances by a minimum of ten percent. The reconfigured loan-to-value- ratio (LTV) would not exceed 97.75 percent of the home's current market value for property with a single mortgage lien. Homes with a first and second mortgage could not surpass 115 percent of the home's value.
Take the case of a homeowner who purchased a $275,000 home with an 80 percent first mortgage of $220,000, $41,250 second mortgage and $13,750 down payment. The value of the home drops to $220,000. The FHA short refinance plan requires the lender to forgive $22,000 of the principal, bring the new loan balance to $198,000. Now, add the second mortgage of $41,250 to the new first loan balance. The new total outstanding loan balance - $239,250, falls below the maximum allowable loan amount of $253,000. Not only will the second mortgage loan holder not have to reduce its loan balance, but the homeowner actual gains equity in this example.
Why the FHA Short Refinance Program Failed
In theory, it seems many home mortgage lenders would rather avoid the expense of foreclosures and short sales, opting instead to work with borrowers to refinance their mortgages. In 2010, the average foreclosure sale for Wisconsin, California, Pennsylvania, Georgia New Jersey, Michigan, Tennessee, and Illinois amounted to 35 percent or more discount. These figures come from RealtyTrac, which track foreclosures across the nation.
Why have so many home mortgage lenders chosen not to participate in the program?
Look at the scenario from the perspective of a mortgage lender. You have a portfolio of homeowners, although underwater in their mortgages, the borrowers still manage to meet their monthly mortgage obligations. What incentive would you have to take a ten percent loss on performing assets? In addition, depending on the particular case, the second loan holder does not contribute to the solution and walks away with its balance on the second loan remains intact.
Since the financial crises, Congress and the White House has seemed to develop a knack for quickly and efficiently getting billions, if not trillions, of dollars into the hands of corporations and banks. However, its record for helping average homeowners save their homes and to bring stability to the housing market has fallen woefully short.