About Government Refinance and Home Purchase Programs

Information and Updates on Government Mortgage Programs
Filed under Government Mortgage Financing Programs News, Updates on FHA short refi program - HOPE loan qualifications

A very interesting article over at CNNmoney.com suggested that many lenders are not enthused about the new HOPE loan/FHA short refi program at all. This is in line with our predictions that HOPE loans will be seen as the very last option by banks when all other options look worse. Here are some quotes:

As part of the massive housing rescue bill passed by Congress in July, troubled borrowers will be able to refinance their home loans with the backing of the Federal Housing Authority (FHA) starting on October 1.

But at a congressional hearing today in Washington, lenders didn’t seem terribly enthusiastic about the program, dubbed Hope for Homeowners.

One lender’s representative, Marguerite Sheehan, Senior Vice President for JPMorganChase (JPM, Fortune 500) Home Lending, testified about the drawbacks of Hope for Homeowners.

“Under the Program, [investors in the loans] will take a loss when the principal balance is written down,” she testified, adding that they won’t have a chance to make up that loss if home prices recover. Sheehan added that Chase can make borrowers’ monthly payments affordable simply by reducing their interest rates, rather than loan principle.

She added that JPMorganChase will use the program when it is deemed to be the best option for investors and borrowers, but that investors would prefer to use alternative loan workouts that give banks and investors the chance to share in any future home price appreciation. That’s similar to the program recently announced by the FDIC for IndyMac Bank.

When asked whether the program would be considered a last resort by lenders, all the members of the panel, including Gross, agreed that it would be.

The good news might be that more and more banks will be looking to modify existing loans in efforts to avoid foreclosure in the next year. The value to a loan modification is that a bank still gets to collect the whole loan amount eventually rather than write down the loan by tens or hundreds of thousands of dollars.

So in the end it looks like the FHA short refi is just as we predicted — a last ditch escape hatch where banks lose less money than they would if they foreclosed and consumers get to stay at home. It is certainly better to have such an eject seat available than not, even if it won’t work for everyone.

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