Questions Surround FHA’s Push into Troubled Mortgages

Key executives from some of the nation’s largest mortgage servicing shops gathered on Capitol Hill Wednesday, testifying before the House Financial Services Committee over the recently-passed and soon-to-be-implemented Hope for Homeowners program that will see the Federal Housing Administration’s authority to underwrite refinanced mortgages for troubled borrowers expanded by a whopping $300 billion. The new program is expected to become effective on Oct. 1.

The emerging consensus among those in the servicing trenches that spoke with HW, however, has been that the program will have less impact than legislators might hope. And that was clearly the undercurrent in committee testimony Wednesday from servicing executives, evident as much in what was said as it was in what wasn’t.

Steven Hemperly, senior vice president of real estate default servicing at CitiMortgage, Inc., went so far as to only mention the Hope for Homeowners program in his closing remarks to committee chairman Barney Frank (D-MA) and other House members. His only mention of the program: “We look forward to the initiation of the Hope for Homeowners program and view it as a useful lending and servicing tool for struggling borrowers.”

While affirming Wells Fargo’s commitment to loss mitigation, execitive vice president Mary Coffin estimated that 30,000 to 40,000 borrowers might qualify for the Hope for Homeowners program. “We will use this program where it is needed,” she told House members.

Other servicers provided similar estimates, but said the total number of loans pushed to the program would likely end up being lower. “We do believe, based on our experience of the last year and a half, that the numbers of borrowers who ultimately take advantage of the program could be lower than the number that preliminarily qualify, as there may be several crucial barriers to the program’s widespread use,” said Molly Sheehan, a senior vice president at Chase Home Lending.

Bank of America loss mitigation head Michael Gross was the only servicer that noted that the company — which now owns mammoth Countrywide Financial’s mortgage servicing portfolio, and is the largest servicer in the nation — had actively engaged in forbearances thus far for borrowers the company believes will qualify under the program.

“We are proactively contacting these customers to confirm their eligibility for, and interest in, participating in the program,” Gross said. “Subject to investor consent and state procedural considerations, we will avoid completing foreclosure sales for the customers identified while the implementing regulations are being drafted.”

Part of servicers’ hesitance to provide details may be due to a lack of details surrounding the program specifics; it’s tough to say who will qualify when you don’t know what the standards will be. HUD commissioner Brian Montgomery, however, assured Congress that everything would be in place in time.

“First and foremost, we want to assure you that we are firmly committed to having the program up and running by October 1, 2008, and believe this goal is achievable,” Montgomery said to open his testimony on Wednesday.

Second liens, higher rates problematic
Beyond the program’s potentially limited reach, other more technical issues would seem to plague the program’s implementation, as well.

HUD’s Montgomery also alluded to perhaps the program’s largest sticking point: second liens. “One of the greatest challenges to successful loan modifications is obtaining the consent of all existing lien holders, including the holders of junior mortgages,” he said. He suggested HUD was close to proposing rules under the HFH program that would have second lien holders share in the government’s interest in the property.

That is clearly something that doesn’t sit well with first lien holders, particularly on portfolioed loans. Chase’s Sheehan said that “it seems counter intuitive that the second lien holder moves into a favored position in sharing future appreciation.”

“We believe it would enhance the success of the program were a similar incentive provided to the first lien holders,” she suggested. First lien holders must write-off significant principal on a troubled loan — down to 90 percent of current LTV — and must contribute the borrower’s initial 3 percent FHA mortgage insurance premium.

Montgomery also warned that loans under FHA’s Hope for Homeowners program would have a higher interest rate than other comparable loan programs — which would certainly seem to undermine the program’s intent to make mortgages more affordable for troubled borrowers.

“Given the distressed nature of the borrowers likely to participate in the program, as well as the 1.5 percent annual mortgage insurance premium mandated for HOPE for Homeowner loans, early indications are that HOPE for Homeowner loans likely will have a higher interest rate than other FHA-insured products, including FHASecure, because they will cost more than standard FHA loans,” he said.