Senate Approves Changes to Mortgage Relief Program

Legislation passed by the U.S. Senate on Wednesday may give new life to a program for financially stressed homeowners that has largely been a dud since it was introduced last year.

The Senate voted 95-5 to approve the Helping Families Save Their Homes Act of 2009 (S. 896), which includes a provision to make it more appealing for lenders to participate in the FHA's Hope for Homeowners' Program. That program, launched last fall, was originally predicted to help up to 400,000 homeowners avoid foreclosure by helping them refinance with a lower-cost FHA mortgage but to date has been largely a nonstarter.

Increases incentives for lenders

The legislation increases the incentives for lenders holding at-risk mortgages to participate in the program and simplifies what has been criticized as an overly burdensome process. It also provides legal protections for lenders who write down part of a mortgage or otherwise reduce a homeowner's payments against lawsuits by disgruntled investors.

As originally envisioned, the Hope For Homeowners Program would enable at-risk homeowners who owed more on their mortgage than their home was worth to obtain a new, more affordable FHA mortgage. A key part of the plan was that lenders holding the original mortgage would have to agree to write off part of the loan, bringing the principal owed to 90 percent of the current market value of the home.

Liability, complexity were turn-offs

The appeal to lenders was intended to be that would still enable them to recover more of their investment than they would likely be able to do through the foreclosure process. However, liability concerns and the complexity of the program turned off most lenders, and the Associated Press recently reported that only 50 borrowers had been approved for new mortgages under the program.

Similar legislation has already passed the House. In addition to the Hope for Homeowners provisions, the legislation also increase the borrowing authority of the Federal Deposit Insurance Corporation from $30 billion to $300 billion through the end of the year, and to $100 billion thereafter.

Increasing the FDIC's credit line will allow it to avoid large increases in the premiums it charges member banks to ensure deposits. It was feared that such increases would further crimp banks' ability to lend in a slow economy.