The federal government's Hope for Homeowners program launched Oct. 1 was initially projected to help as many as 400,000 struggling borrowers avert foreclosure over the next three years.
But fewer than 100 homeowners applied for the program in October, and the Federal Housing Administration now projects that just 13,300 will be helped in its first year. An FHA official said at a mortgage industry conference recently that one large lender had reported that in a group of 23,000 troubled borrowers only 1,200 would be eligible for the program.
Hope for Homeowners is designed to allow borrowers who are behind on their payments to refinance into more affordable loans that are insured by the FHA. The idea is to reduce the loan balance and, if necessary, the interest rate to lower the monthly payment by 30% and to restore the borrower's equity in the home. When the property is sold, half of any increase in its value goes to the government.
But lenders, mortgage investors and borrowers all see drawbacks in the FHA plan and have been slow to embrace it, industry and government sources say.
In some cases, the interested parties are playing a waiting game, hoping that other potential foreclosure-prevention options, among them a proposal promoted by Federal Deposit Insurance Corp. Chairwoman Sheila Bair, will be more attractive.
The initial reaction suggests Hope for Homeowners could be just the latest in a series of government and industry efforts that have failed to stem the rising tide of foreclosures.
"None of them have worked very well, and we're all pretty disappointed," said fair-housing advocate John Taylor, president of the National Community Reinvestment Coalition.
The experience with Hope for Homeowners has implications for foreclosure-prevention proposals said to be under discussion by the Treasury Department and the White House, including the Bair plan, which would use $50 billion from the $700-billion financial bailout legislation to provide government backing for modified mortgages. A potential model for that plan is an effort the FDIC is undertaking at Pasadena's failed IndyMac Bank that calls for cutting interest rates to as low as 2.5%, extending loan terms to 40 years and allowing borrowers to make payments on only a portion of what's owed.
The Bush administration is also reportedly considering a proposal by the mortgage industry to split loan losses with the government, costing taxpayers about $50 billion.
Andrew Gray, a spokesman for Bair, said it "would be premature to read into or draw conclusions on the process at this time." White House and Treasury officials didn't respond to requests for comment.
For lenders who originated the troubled loans, and the investors in mortgage securities who now own most of them, a major downside to the Hope for Homeowners program is that they must accept a big loss on each loan refinanced through the program.
For a borrower to participate, the owner of the existing loan -- usually investors in mortgage-backed securities -- must agree to accept as repayment the proceeds of the borrower's replacement loan, which isn't to exceed 90% of the revised value of the home.
But sharp declines in home prices have left many recent home buyers owing much more than their properties are worth, meaning lenders would have to forsake a substantial portion of the amounts currently owed to them.
In addition, the program requires the borrower to pay an upfront FHA insurance premium of 3%. Because applicants probably won't have the funds on hand to pay that fee, they would have to borrow it as part of the new loan -- essentially capping the refinanced loan at 87% of the home's value.
For example, if a borrower owes $360,000 on a house now appraised by FHA at $300,000, the borrower's new loan would be for $270,000, but only $261,000 would go to the owner of the existing loan. The bottom line: a loss of $99,000, or 27.5%.
It's not just owners of existing mortgages who find Hope for Homeowners unattractive.
Jeff Lazerson, a mortgage broker in Laguna Niguel, said he had yet to find a single lender he works with who would write a Hope for Homeowners loan.
The main reason, he said, is that FHA insurance isn't valid if the borrower misses the first payment, and lenders believe that is a much bigger risk with Hope for Homeowners loans than with regular FHA mortgages.
"They think they're going to get all the train-wreck mortgages that the other lenders want to dump," said Lazerson, president of Mortgage Grader, an Internet-based loan shopping site.
Borrowers also see drawbacks in Hope for Homeowners. In addition to sharing any future appreciation in their home's value, borrowers must pay an annual insurance premium of 1.5% of the loan balance, nearly three times the usual FHA fee. That premium, on top of the interest rate, would mean a borrower would pay as much as 8.5% annually.
Plus, any borrower whose income was overstated on the application for the original loan is barred from the Hope for Homeowners program, regardless of whether they knowingly participated. That eliminates a large number of housing boom-era loans that allowed borrowers to state their income without verification.