Gov't Considers Changes to Mortgage Program
November 12, 2008 - 5:07 PMThe government may let more borrowers qualify for a $300 billion program designed to let troubled homeowners swap risky loans for more affordable ones, a top Bush administration official said Wednesday.
The program, included in a housing bill passed by lawmakers over the summer, was launched Oct. 1. But there are concerns that lenders won't participate because they have to voluntarily reduce the value of a loan and take a loss.
"We're concerned that the program - as constructed today - is limiting people's availability," Department of Housing and Urban Development Secretary Steve Preston said in an interview with Associated Press writers and editors.
In its current design, lenders have to take a big loss. They must absorb the difference between the current mortgage's value and a new loan for 90 percent of the house's current appraised value. One potential change is to make the new loan around 97 percent of the current home value, thus requiring lenders to take a smaller loss, Preston said.
Making that change and others "would open up participation in the program," he said.
Designed by lawmakers eager to respond to the mortgage crisis, the Congressional Budget Office had projected over the summer that the program would let 400,000 troubled homeowners swap risky loans for conventional 30-year fixed rate loans with lower rates.
But the early results are discouraging: the government received only 42 applications in the program's first two weeks, according to the Federal Housing Administration. And only 20,000 applications are expected by next fall, according to early projections.
To participate, homeowners can try to persuade their existing lender to join the program, but the decision is ultimately up to the lender. The banking industry appears likely to favor options that don't require an immediate reduction in principal, such as deferring payments, allowing partial payments and lowering the interest rate.
In addition, the program may be unattractive to some borrowers because those who sell their properties must agree to share some of their profits with the government.
Meanwhile, HUD also is revising the often-confusing disclosure forms that home buyers receive when they refinance a loan or buy a new house. HUD announced Wednesday that it completed an overhaul 1974 law requiring lenders to give a so-called "good faith estimate" of mortgage costs, including lenders' payments to mortgage brokers.
"It's a big step forward in restoring trust and transparency between the industry and homeowners," Preston said.
The government, which originally proposed revising these forms more than six years ago and released its latest proposal in March, says the new forms - to be required starting in 2010 - should save consumers around $700 in closing costs.
Preston acknowledged that industry opposition stalled similar government changes. Had they been made earlier, "it would have reduced the impact of the crisis that we're seeing today," he said.
Nevertheless, changes to the stack of paperwork that consumers must sign before buying a house will have a big impact on thousands of real estate agents, mortgage brokers, banks and title companies.
The real estate industry had flooded HUD with complaints that the changes would be complicated and costly, and don't necessarily make the process easier for consumers to understand.
In theory, if borrowers had a better understanding of loan terms, they might have avoided some of the riskier loan products that became popular in recent years - such as subprime loans, or so-called option ARMs that allow borrowers to pay only the interest on the loan or even less, so the principal increases.
Minorities have been most abused, research shows. A study of 7,500 mortgages released in May by the Urban Institute and HUD found that black borrowers paid $415 more in loan fees on average than white borrowers. For Hispanics, the difference was $315.
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