A fledging mortgage relief program, launched by the Obama administration to stabilize the housing market, has taken a hit from Congress.
As part of an overall push to curb government spending, the House of Representatives last week voted to “terminate” the Federal Housing Administration’s short refinance program. The Senate is not expected to pass the measure, and the White House has threatened to veto it, according to Reuters reports.
The short refinance program is designed to help responsible homeowners who, due to weak job and real estate markets, are at risk of losing their homes. These cash-strapped homeowners now owe more than their homes are worth, and are unable to refinance their mortgages to lower their monthly payments and face difficulty selling their homes. The FHA estimates up to 15 million mortgages - 25 percent of outstanding mortgages - are underwater.
“Job losses and price drops have meant that we see foreclosures and defaults in prime loans,” said David H. Stevens, FHA commissioner, testifying before the House Financial Services Committee in early March. “As a result, foreclosures are increasingly being driven by homeowners who find themselves unemployed or underemployed and can no longer make payments that were once affordable.”
The program, which became available to homeowners in September, was described as a “lifeline” to help up to 4 million struggling homeowners through the end of 2012. The program is structured so that private lenders, not the taxpayers, absorb most of the cost by agreeing to reduce the amount of principal owed on the loan. Principal reduction is less costly to the lender than foreclosure, Stevens said.
The refinance program may have lofty goals, but all sides agree it has had little impact so far. Only 44 mortgages have been refinanced in the six months the program has been in effect, but advocates of the plan say Congress needs to give the measure more time.
“Cancelling the program prematurely” would cost the taxpayer more in the long run, said Stevens, who noted that 23 lenders now participate in the program, and another 17 have signed up. The number of loans endorsed to date is “relatively low,” said Stevens, but the infrastructure to support the complex transactions is now in place. Wells Fargo and GMAC/Ally both recently announced they will begin working with the program.
The loans are structured to help homeowners who are current on their payments, but are struggling to make ends meet. To qualify, homeowners must owe more on their mortgage than their home is worth, and they must be current on their mortgage and must have a credit score of 500 or more. The average credit score of participants to date is 711, Stevens said.
The property must be the homeowner’s primary residence and the existing loan to be financed cannot be an FHA insured loan. Lenders must agree to write off at least 10 percent of the unpaid principal balance, and the new loan-to-value ratio must be no greater than 110%.
The refinanced FHA-insured mortgage must have a loan-to-value ratio of no more than 97.7 percent. The program is financed with up to $8 billion in TARP money to underwrite the newly refinanced mortgages.
“The cost of providing the principal write downs, which is borne by the private sector, is lower than the eventual loss if the loan were to default and the home go to foreclosure,” Stevens said. “The FHA refinance option provides a vehicle for many investors and lenders to reduce their expected losses while also providing responsible borrowers with meaningful debt relief and better enabling them to afford to remain in their home.”