Mid-Tier Lenders Shut Out of Hope for Homeowners, Sources Say
The Hope for Homeowners program, enacted three months ago along with the housing bill passed in July and officially effective on Oct. 1, targets borrowers at risk of default and foreclosure, and helps them "refinance into more affordable, sustainable loans," according to the U.S. Department of Housing and Urban Development Web site. The way it's supposed to work is pretty simple: the Federal Housing Administration insures loans that are written down to 90 percent of the current loan-to-value by the lender, giving the borrower an initial 10 percent equity in the home, which--if retained upon repayment--will be split with the FHA whenever the home is sold. So the borrower should benefit along with (in theory) the lender, who takes a loss on the existing loan but benefits in the long run by avoiding substantial foreclosure costs. If only things worked the way they were supposed to. In reality, servicers and investors are reportedly leery of taking the 13 percent haircut relative to current LTV needed to get into a H4H loan (that extra three percent is an up-front insurance premium). Worse yet, smaller, independent mortgage bankers -- the so-called mid-tier lenders in the mortgage origination market -- now say they are finding it difficult to turn around and sell these refinanced loans to the large investors they work with on a consistent basis. Which means even if an investor or trustee agrees to take the loss and refinance a loan into the H4H program, there often isn't a buyer on the other end willing to take the loan. HousingWire began hearing late last week from lenders who had signed up to participate in the H4H program -- and are listed on the FHA's website as sources for troubled borrowers to call -- but had surprisingly encountered roadblocks put up by investors hesitant to back them on the other end of the deal, during funding. Most mid-tier lenders operate via warehouse lines of credit: if they aren't allowed to push the refinanced, FHA-insured, Hope for Homeowners loan through an available warehouse line, they can't fund the deal, regardless of what happens on the front end of the process. For their part, potential buyers appear hesitant to acquire what they see as the high risks associated with these refinanced debts, since participation in the program typically requires borrowers to be delinquent in the first place, according to one independent mortgage banker who asked not to be named in this story. "It seems to us like they created a great program but nobody's willing to step up to the plate and take a lead on it, to extend this to borrowers," the source said. The source's firm operates in more than 30 states, working with brokers and lenders on one side to help borrowers who want to refinance their mortgages. The firm then funds the refi loans and sells them to its group of correspondent investors on the other side -- investors, the source said, that represent most of the well-known names in the funding market. Although the company has cast out a line asking correspondent investors in its network if they care to participate in H4H loans, it hasn't received any nibbles yet. "Of the nine [investors] that we sell to, only three of them have come out with a disposition on it, and they have said no," she said. "And the other six haven't said anything." The reason behind this is simple, she said: "No one's interested in acquiring bad debt." Although the source acknowledged that some banks have taken strong initiatives on the retail side to offer alternative refi programs to customers that don't qualify for the H4H program, she said such offers so far appear limited to loans the banks are currently servicing. She said three large banks -- JP Morgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and Flagstar Bancorp Inc. (FBC), in particular -- have decided to limit their participation in the program to their own loans for similar reasons: even with a reduced balance and/or interest rate, and a government guarantee, lenders don't want somebody else's garbage, according to the source. Two banks, Wells Fargo and Chase, confirmed they are participating in the H4H program -- but only for loans already in their portfolios, and not as an investment in H4H loans that come out of mid-tier lenders or independent mortgage bankers. Spokespeople from both Wells and Chase said the banks are eager to offer H4H refinancing for their current customers, but expect a slow start on that end. Chase also announced Friday a separate "mass mod" program for its most troubled borrowers. Officials at Flagstar said it was "inaccurate" to suggest they weren't funding H4H loans via correspondents, but declined to provide further details. It's not clear how much potential refinancing volume is being shut out of the Hope for Homeowners program because of the lack of available funding to independent and mid-tier lenders, but nearly every source HW spoke to said they were receiving tens to hundreds of phone calls per day from borrowers looking to refinance. Robert Paduano, managing director at Allegro Funding Corp., a mid-tier lender that operates in 24 states, said he receives hundreds of calls a day from borrowers wanting to rewrite their loans. He said the company sends out a package and a simple statement: “As soon as something’s about to be rolled out, we’ll give you a call.” Write to Diana Golobay at firstname.lastname@example.org. Disclosure: The authors held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.