Hope for Homeowners Unattractive to Many

The government's solution to the foreclosure crisis isn't drawing many takers, and new estimates say the program will fall far short of initial projections.

When U.S. Olympic diver Laura Wilkinson steps up on the platform to perform her signature dive, the audience is eager to see something stunning. Similarly, when the U.S. government devises a plan to stem a crisis, everyone's hoping for a rock-solid performance. Unfortunately, the government's answer to the foreclosure problem hasn't exactly been a pinpoint entry.

Foreclosure prevention a flop

Earlier in the year, lawmakers debated heavily about the pros and cons of passing a foreclosure prevention program. Critics worried about the message sent by bailing out those who had purchased homes that they couldn't afford. Proponents argued that something had to be done, even if that meant helping people who had made bad decisions. Hope for Homeowners, also known as H4H, was the solution born from those debates.

The program was approved in July, and went into effect on October 1st. In its first month, however, H4H had fewer than 100 applicants. At that rate, it would take more than 333 years to bring "hope" to the 400,000 homeowners whom the program was originally expected to help. Not surprisingly, that target has since been revised; the feds now say Hope for Homeowners will help only 13,300 Americans in its first year.

Unfortunately, this projected pace is clearly insufficient relative to the size of the foreclosure problem. According to RealtyTrac, foreclosure filings were reported on 279,561 U.S. properties just during the month of October alone.

Poorly conceived plan

The combination of two qualities has impeded H4H's progress thus far. First, lender participation is voluntary. Secondly, the program sticks all of the losses with the lender and its main funding source, the investor. Common sense says that a program that's both unattractive and voluntary is not going to gain any traction.

Two aspects of the program stand out as unworkable from a lender's perspective:

• The borrower's new loan must not exceed 90 percent of the home's value. Since most properties have declined as much as 39 percent in the past year, this cap potentially creates a significant loss for the lender or investor. Further, the borrower is required to pay an upfront FHA premium of 3 percent. If the borrower finances this 3 percent, the lender's proceeds from the refinance will be only 87 percent of the home's current value.

• FHA insurance is not valid if the borrower misses the first payment on the loan. Lawmakers initially believed that lenders would be enticed to participate in H4H because the new loans would be FHA-insured. Lenders don't see it this way. They fear that the borrower will miss the first payment, and start the foreclosure cycle all over again.

It's true that Laura Wilkinson misses a dive now and again. And U.S. lawmakers aren't perfect, either. But if ever there was a time when precision was crucial, this is it.