Secretary of Housing and Urban Development Steve Preston said the centerpiece of the federal government's effort to help struggling homeowners has been a failure and he's blaming Congress.
The three-year program was supposed to help 400,000 borrowers avoid foreclosure. But it has attracted only 312 applications since its October launch because it is too expensive and onerous for lenders and borrowers alike, Preston said in an interview.
"What most people don't understand is that this program was designed to the detail by Congress," Preston said. "Congress dotted the i's and crossed the t's for us, and unfortunately it has made this program tough to use."
The criticism comes as Congress prepares to weigh in with further plans to help distressed borrowers facing foreclosures, which are at the root of the financial meltdown. This week, House Speaker Nancy Pelosi (D-Calif.) demanded that the Treasury Department use some of the money from the $700 billion emergency rescue package to help at-risk homeowners.
One of several federal and state foreclosure prevention initiatives facing difficulties, HUD's Hope for Homeowners program has been especially hamstrung. For instance, a program launched by the Federal Deposit Insurance Corp. on behalf of IndyMac Bank customers has modified more than 3,500 mortgages in two months of operation.
Rep. Barney Frank (D-Mass.), who helped steer the HUD program through Congress, said some of the federal bailout money should be used to revamp it. Frank acknowledged the initiative has its problems, but he blamed them on the Bush administration.
"That's partly their fault," said Frank, chairman of the House Financial Services Committee. "The administration was critical of the program and kept putting pressure on us to make it cheaper and more restrictive. . . . If it hadn't been for the Bush administration's opposition, we would have written it in a better way in the first place."
The goal of the program, run by the Federal Housing Administration, was to allow borrowers who owe more than their homes are worth to refinance into more affordable 30-year fixed-rate mortgages insured by the government.
But part of the problem is that the program's success hinges on the lenders' willingness to participate.
Congress originally allowed the FHA to insure new loans for only 90 percent of a home's value. With home prices plunging, borrowers who have little or no equity in their homes and cannot otherwise come up with the remaining 10 percent qualify only if the lender forgives this balance. Lenders balked.
Late last month, Congress granted HUD permission to increase the amount that's insured and the department decided to guarantee up to 96.5 percent of the value of new loans. Preston in the interview praised that change. But its impact remains unclear.
"Getting the lenders to agree . . . has been our biggest challenge," said Peyton Herbert, director of foreclosure services at HomeFree USA, a housing counseling firm in Hyattsville. "They want dollar for dollar what's owed on that loan or something close to it. That's the fly in the ointment."
The list of impediments goes on. Borrowers who participate in the program must pay hefty fees and high interest rates, and they must split any increased value with the federal government when the home is sold.
"You're paying a premium to borrow the money already, and that ought to be enough," said John Taylor, chief executive of the National Community Reinvestment Coalition. "To me this falls into the category of, we want your firstborn."
A further hindrance: The mortgage payment must exceed 31 percent of a borrower's income as of March, which does not help people who have since fallen into trouble.
Add to that the fact that borrowers must also provide two-years of financial records and sign a statement that they did not give false or misleading information on their original loan application and the bar gets even higher. It becomes even more difficult to attract borrowers who took out loans without verifying their income.
"How do you do that?" Preston said. "That was legislated."
For all those reasons, FHA Commissioner Brian Montgomery said he got an earful from agitated lenders, housing counselors and real estate agents at a seminar last month in Atlanta designed to educate housing professionals about the Hope for Homeowners program.
"What we thought would be a civil and cordial exchange with the several hundred people gathered turned into an almost rock-throwing episode," Montgomery said.
He said Capitol Hill lawmakers were hampered by a philosophical divide within their ranks when they cobbled the program together and that led to a compromise that made little sense.
"There were two philosophies on the Hill: Let's throw the barn door open and help as many people as we can regardless of the reasons. Or we need to make them pay because they should have known what they were doing," Montgomery said. "They found some middle philosophical ground, but that philosophical middle ground made [the program] unworkable."
Montgomery complained that any minor adjustment to the program must be passed through an oversight board, which further slows the FHA's response time.
Frank called Montgomery's assessment of Congress's handling of the legislation "dishonest."
As for oversight, he said the board is made up of Bush appointees. "Shame on them if that's the problem."
Frank acknowledged, however, that concessions had to be made to make the program palatable to the American public. This is why borrowers who take part in it must share any gains from appreciation in home values with the government.
"You're not going to get a program approved that helps people refinance loans on their homes and then allows them to turn around the following year and make a profit on that home," Frank said.
Frank provided a letter he wrote to Treasury Secretary Henry M. Paulson Jr. in late November urging him to use the bailout money Congress approved for rescuing the financial markets to reduce the upfront and annual fees, because these are reducing use of the Hope for Homeowners program.
In another letter to Paulson, Preston, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila C. Bair, Frank made a few more suggestions and praised HUD's decision to increase the proportion of loans that the FHA can insure to 96.5 percent from 90 percent.
But yesterday, he said the FHA's leadership in these trying times has been a "disappointment."
Montgomery said Frank's ire at his agency is misdirected. "Barney Frank may have a beef with some of the Republicans," he said, "but he shouldn't have a beef with us."