Opinion: Trying again to offer troubled borrowers Hope

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The Obama administration added two more elements today to its homeowner-assistance program, offering help to more borrowers -- and encouraging investors to offload more of their riskiest mortgages onto the taxpayers.

The original Making Home Affordable program, which the Treasury Department announced earlier this year, enabled more troubled borrowers to refinance their Freddie Mac- or Fannie Mae-backed mortgages. It also provided subsidies to encourage lenders, loan servicing companies and borrowers to agree to temporary loan modifications that reduced monthly payments to 31% of the borrower’s income. But the program didn’t do anything about second mortgages, nor did it address many troubled borrowers with loans that were deeply underwater (that is, their homes were worth 95% or less of the amount they owed).

One of the new features announced today would enable borrowers with second mortgages -- a situation that describes about 50% of those in danger of foreclosure -- to get a temporary cut in interest rates on both their loans. This initiative addresses two problems with the loan modification program: the need to pay off a second loan made it impossible for some borrowers to afford their homes, even with a steep reduction in the primary mortgage, and the refusal by some lenders holding onto first mortgages to accept lower monthly payments as long as the second mortgage holder kept collecting the full amount.

The other initiative announced today would integrate a new version of the Hope for Homeowners program into the loan modification efforts. That program calls for lenders to write down a troubled borrower’s debt until it’s a bit less than the value of the house, then refinance the mortgage into a loan guaranteed by the Federal Housing Administration. The original version, which Congress approved last year, was a bust among lenders and borrowers alike -- in trying to screen out fraudulent borrowers and prevent unjust enrichment, Congress had made the program unwieldy and unattractive. Lawmakers are moving a bill to address the major shortcomings (it’s been hotly disputed, but for other reasons); in the meantime, the Treasury Department said it would require mortgage servicing companies to evaluate troubled borrowers who were in line for loan modifications to see if they qualified for Hope for Homeowners. If they did qualify, the servicers would be required to ask the investors who owned the mortgage if they wanted to write it down and hand off the borrower off to another, FHA-backed lender. The thinking is that investors might settle for the lower payout offered by Hope for Homeowners rather than modifying the loan because a modification would still leave the borrower underwater -- and tempted to mail in his keys.

Here’s the problem, though. The greater the risk of a borrower abandoning a home, the more likely an investor group is going to want to turn that loan over to Uncle Sam through Hope for Homeowners. The FHA’s underwriters would provide some protection against the feds assuming the worst loans, but a more important risk factor is housing prices. If the worst of the decline is behind us, borrowers who walk out on loans written down through the Hope for Homeowners program would leave the FHA guaranteeing amounts below or near the current value of the repossessed home. But if property values slide much further, homeowners would have more reason to give up on their loans, and the FHA would be stuck with considerable losses.

The changes to Hope for Homeowners will take a few months to put into place, buying more time for the market to bottom out. The flip side is that the longer it takes to get the program going, the fewer homeowners who’ll be helped. If you’re concerned about the impact of foreclosures on neighborhoods, the banking system and the economy, that’s problematic. But if you’re disturbed by the thought of the government bailing out any homeowners, no delay is too long.