New hope for Hope

From a recent news source comes this story of renewed hope.The Bush administration said recently that it was changing its nearly-moribund mortgage rescue plan in an effort to spark more lenders and homeowners to participate.

The Department of Housing and Urban Development's Hope for Homeowners mortgage rescue plan, which Congress toiled over for months before passing legislation last summer, took effect Oct. 1. The program aimed to help hundreds of thousands of homeowners by putting up government insurance behind cheaper, refinanced mortgages, for people at risk of foreclosure. But since then, few troubled mortgage loans have been modified under the plan. Now, in an effort to kick start it, HUD is trying to open up the program to more homeowners. "Clearly, meaningful changes were needed," said HUD Secretary Steve Preston. "These modifications should increase lender participation and help more families who are having difficulty paying their existing mortgages, but can afford a new affordable loan insured by HUD's Federal Housing Administration."

Smaller write downs: In the biggest change, lenders that participate in Hope for Homeowners won't have to write down loans as much as they did under the original rules for the program. The new guidelines allow them to reduce mortgage principal to 96.5% of a home's current market value - instead of 90%. The new ratio guideline only applies to those whose new loan payments would not exceed 31% of their gross incomes. The write down will remain 90% for borrowers who are paying a larger percentage of their income toward their mortgage debts.

"This balances competing aims of encouraging more borrowers to enter the program while controlling for potential losses due to re-defaults," Tom Deutsch deputy executive director of the American Securitization Forum, a group that represents the interests of investors in mortgage backed securities. The smaller write downs make it cheaper for lenders to participate in this strictly voluntary program.

The second change involves second lien holders, such as home equity lenders, of homeowners seeking to refinance into HUD loans. Payments to lien holders: Under the changes announced Wednesday, HUD will make up-front payments to get second lien holders to relinquish their rights to future payments.

Second lien holders often slow the mortgage modification process because they have nothing to gain from agreeing to refinancings, known as workouts. The values of the collateral - the homes - are almost always less than the amounts borrowers owe to the primary lenders. The amount of payments to second lien holders will be negotiated on a case-by-case basis, according Deutsch. The more a loan is underwater - meaning a borrower owes more than a home is worth - the lower the value of the second lien and the less HUD will likely pay for releases. Deutsch said he expects the payments to range between 5% of second lien in cases of the most severely underwater loans to as much as 30% for mortgages that are not as far gone as that.

40-year mortgages: Lenders will be able to extend the terms of loans to 40 from 30 years. Extending the number of months borrowers have to repay their mortgages reduces monthly obligations. Sometimes that can make the difference between affordable and unaffordable loans.

No more test runs: In addition, the original legislation mandated a three payment trial term, during which borrowers had to pay faithfully before the modification became permanent. The new guidelines eliminate that requirement.

Let's all hope that these changes will allow the Hope for Homeowners program to live up to its name. I certainly hope so.