Lenders to FHA Foreclosure Help: Thanks, But No Thanks

The FHA's new Hope for Homeowners program is supposed to be an answer to this country's foreclosure problem. Mortgage lenders like the idea, but only after other efforts have failed.

At the end of Casablanca, Humphrey Bogart's character, Rick Blaine, says, "Louis, I think this is the beginning of a beautiful friendship." That's the kind of camaraderie the FHA wants to develop with U.S. mortgage lenders. The federal agency is optimistic that its new program, Hope for Homeowners, will foster the teamwork necessary to pull the U.S. out of its foreclosure crisis.

A teamwork approach

Hope for Homeowners is a loan workout program that requires collaboration among lenders, borrowers, and the FHA. The program targets subprime borrowers who currently owe more than their property is worth. Outside of Hope for Homeowners, these borrowers have few options: they can't refinance or sell the home without coming up with a big wad of cash.

The new FHA program addresses the situation by asking lenders to write-down the value of the debt to 90 percent of the property's current market value. In return, the lenders get FHA insurance on the new mortgage-which protects the lender from borrower default.

What's not to like?

At a recent Congressional hearing, representatives from JPMorganChase, Bank of America, and Wells Fargo had the opportunity to tell lawmakers what they thought of the new program. The consensus was this: Hope for Homeowners might be an option for some borrowers, but certainly not for all of them. Lenders emphasized the need to pursue other types of loan modifications before writing off principal.

Reducing the debt balance to 90 percent of the home's current value is considered a short-sighted solution. The write-down translates into an immediate loss for mortgage investors. Plus, it leaves no opportunity for those investors to recoup anything from future home value gains. Some lenders have suggested that they could achieve similar results-that is, a lower mortgage payment-with a temporary interest rate reduction on the loan. That strategy might be preferable, because it leaves the door open for investors to regain their losses.

IndyMac Federal paves the way

The FDIC is currently pursuing aggressive lender workouts for delinquent IndyMac borrowers. Roughly 8 percent of them are in default.  Under the direction of the FDIC, IndyMac Federal has been offering affordable loan modifications to those borrowers who can document their income. The underwriting team is using several methods to reduce borrowers' payments, including interest rate reductions, lengthened payoff schedules and, sometimes, principal reductions.

FDIC Chairperson Sheila Bair has been a proponent of loan modification, but she also recognizes lenders' responsibility to protect the interests of their investors. Ultimately, that responsibility may be what keeps many from using the Hope for Homeowners program.

Right now, it doesn't look like lenders and the FHA will be walking off into the sunset together, arm in arm. Lenders will continue reworking loans, but they're likely to do it on their own terms.