Bank Lawyer's Blog

Tighten Up! No, Loosen Up!

The Obama administration’s recent call for mortgage lenders to loosen underwriting standards on residential mortgage loans to less-than-“Qualified Mortgagors” as long as the FHA (i.e., the American taxpayer) is taking most of the risk of default, generated some pretty strong reaction from the usual suspects.

"If that were to come to pass, that would open the flood-gates to highly excessive risk and would send us right back on the same path we were just trying to recover from," said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.

[…]

"There's always a tension that you have to take seriously between providing clarity and rules of the road and not giving any opportunity to restart the kind of irresponsible lending that we saw in the mid-2000s," said a senior administration official who was not authorized to speak on the record.

Ya’ think?

The administration is also purportedly urging the Justice Department to ease up on lenders who make loans in accordance with the administration-encouraged looser and goosier FHA underwriting critera. The FHA also claims that it hopes to encourage "by example" Fannie Mae and Freddie Mac to follow along. It's as if the subprime meltdown never occurred and Dodd-Frank was never passed, except for the fact that the federal banking regulators, including the CFPB, are taking a directly contrary approach to mortgage underwriting. Moreover, loan originators live in mortal fear of Freddie and Fannie repurchase requests, which have been massive, since those two publicly-controlled giants are the conventional residential mortgage market.

This whip-saw of inconsistency evidences a major example of cognitive dissonance.

Private reaction from bankers and bank lawyers with whom I attended the recent Texas Bankers Association Annual Legal Conference in Austin, Texas, was even more derisive.  Much time during that conference was spent parsing the nuances of “Qualified Mortgages” and “Qualified Residential Mortgages,” which will make qualifying for a residential mortgage loan much more difficult for many potential homeowners. In addition, the plethora of new regulations being spewed out by the CFPB makes consumer lending, including making single family mortgage loans, riskier and more expensive. The bottom line for a number of community bankers is that they will be making few, if any, residential mortgage loans, at least not directly. In addition, bankers who decide to make residential mortgage loans are definitely not crazy about making anything other than loans that will fall under the QM safe harbor.

I would say that it’s amazing that the administration could talk so glibly out of both sides of its mouth, except that it’s not at all amazing. It’s what these cynical, pandering clowns do as naturally as breathing in oxygen and exhaling carbon dioxide.

We Pause For An Off-The-Wall Moment

The most recent column by Scott Burns advocates a "hair of the dog" strategy concocted by statistician Michael Castleman that, I'm certain, will inspire a number of readers to experience a profound "WTF?" moment.

Michael Castleman has an idea that could do wonders for anyone who owns a house. It could also do wonders for our economy by boosting home sales, and boosting employment related to home building, home buying, and the furnishing of homes. Basically, this is an idea that would have a positive impact on three big factors in our economy— jobs, home values and consumer confidence.

[...]

His idea is simple. I call it “the-hair-of-the-dog-strategy”, after the well-known antidote for hangovers. In this case the hair-of-the-dog isn’t more tequila shooters.

It’s more lending.

Here are the high points for readers who are pressed for time:

Congress passes legislation that orders the FHA, FNMA and FHLMC to make a trillion dollars in home loans at an interest rate of 3%.That generates servicing and origination income, and, Castleman expects, related service industry income (e.g., Home Depot). This will "add enough demand to bring the supply/demand balance of residential real estate back to normal levels— levels that will support stable or rising prices."

As to those critics who allege that in order to make that many loans in the four-to-five-year period proposed by Castleman's plan, underwriting standards would have to be lowered, Castleman asserts that those standards are so tight now that they're choking off credit, which is exacerbating depressed home prices. In that respect, loosening them would be a good thing. He also asserts that even if 40% of the new loans go sour and the foreclosed homes are sold for only 60% of original loan value, the $240 billion loss is a pittance to what the US taxpayer is expected to plow into Fannie Mae and Freddie Mac before those money pits are finally "resolved" (current estimate: somewhere north of $400 billion).

The difference is that there would be an upside.  What we have today is a formula for years of stagnation and homeowner hurt.

It's an idea that is not only "hair-of-the-dog," but is likely to be seen by Congress to be as attractive as a "hair ball." In my estimation, Castleman's proposal has as much chance of being enacted as Lindsay Lohan has of winning the lead role in a motion picture biography of Mother Teresa because "they share so many personality traits in common" (like inhaling oxygen and exhaling carbon dioxide).

Still, it's bold, in the way that extending the payroll tax moratorium and pumping hundreds of billions of dollars into public infrastructure are not. Moreover, Burns' conclusion is right (even if his slogan is as tired as conventional thinking): we do need to "think outside the box." Unless, of course, you love the economic stagnation in which we're currently wallowing, in which case, we should just "stay the course."

Unfair Market Appraisals

The American Banker recently ran an article (paid subscription required) that discussed one of those hare-brained legislative schemes that pop up in times of economic crisis and that lead us to conclude that when states rights advocates refer to states as "laboratories of democracy," they are referring to the laboratory of Doctor Frankenstein (pronounced "Frank-en-steen" for all you "Young Frankenstein" afficianados). This scheme involves the plans of four states, Illinois, Nevada, Missouri and Maryland, to enact legislation "that would prohibit or restrict appraisers from using distressed sales, such as those of foreclosed properties, as comparable sales when assessing the value of a home." The promoters of the legislation say that widespread foreclosures and short sales in those states have "distorted" the market, driving down the prices of houses generally, because the distressed sales are used as "comparables" by appraisers. As a result, homeowners can't exercise their "right" to refinance their homes from high interest rate mortgages to low interest rate mortgages. Obviously, you'd need a healthy hit of peyote before reading a state constitution closely enough to find that right enshrined therein, but we've become a society where the term "right" is loosely defined and peyote prevalent.

It's amusing that legislators who think nothing of "distorting the market" if that distortion curries favor with the average homeowner, a homeowner who might like the idea of the state government artificially propping up the value of his home, would likely blanche the color of Caspar if you proposed allowing banks who invested in commercial real estate loans to amortize their losses over an extended period of time, which, as regular readers recall, was a legislative proposal first included, then removed, in the small business lending bill passed last year by Congress. After all, there are a lot more homeowners than there are community bankers.

The critics make their case that such legislation will have deleterious effects:

• artificially inflated housing prices were the cause of the last bubble and there's no reason to think that they won't lead to another.
• Fannie, Freddie, and the FHA may very well refuse to accept appraisals written in those states (so, good luck encouraging more home lending).
• Appraisers would be violating federal appraisal standards.

Bill Uffleman, president of the Nevada Bankers' Association, asks: "Part of the problem in creating the false housing economy was shaky appraisals," Uffelman said, "and now we want to sanction a new round of shaky appraisals?" Yes, Bill, that's exactly what "we" want to do, if by "we" you mean some pinhead legislators who understand many laws, but apparently not the law of unintended consequences.

Too Big Not To Dismember

"Break 'em up!" That's what independent community banks are crying about the "too-big-to-fail" giant banks, and Jerry Walker, CEO of the Independent Bankers Association of New Mexic,o tells New Mexico Business Weekly reporter Dennis Domrzalski why.

"This financial crisis started with the big guys, but the little guys have wound up paying a disproportional price.”

As the story discusses, consolidation of the banking business in New Mexico, which has seen the number of banks in the state halved in the last 25 years, mirrors what's happened on a national scale, especially since the enactment of the Gramm-Leach-Bliley Act in 1999. That law battered down the wall between commercial and investment banking and added racket fuel to the growth of the nation's biggest banks.

“Since the change in the law, the largest 20 firms have increased their control of the nation’s banking assets from about 35 percent to an astonishing 70 percent,” [Federal Reserve Bank of Kansas City President Thomas] Hoenig said. “Even more striking, perhaps, is the fact that some of these firms are now 30 to 40 percent larger than they were when this [U.S. financial crisis] began, and as you know, many of these firms were protected during the crisis.”

Banking consultant Joe Bidal expressed a view held by many community bankers, inside and outside of New Mexico, when he talked about how the federal regulators catered to and saved the biggest banks while lopping off the heads of local lenders like Charter Bank (previously discussed on this blog here and here).

“When you lose a Charter, which invested almost exclusively in New Mexico, it makes it more difficult for local businesses to finance their needs. You add that to the incredible pressure that federal regulators are putting on local banks to reduce their exposure to commercial real estate and you have a big problem.”

Yes, you have a big problem. And it's a problem that's growing with every seven-bank "Bank Fail Friday" like the one we had last week. A paranoid person might suspect that there's a method to this madness, that the federal regulators have decided to nationalize the entire commercial banking system of this country, in the same way that it's in the process of effectively nationalizing the residential mortgage lending business through its de facto nationalization of Fannie Mae and Freddie Mac and its dramatic expansion of FHA lending. The fewer the number of banks, the easier the system is to capture.

A cynic, on the other hand, would simply assume that the inmates are currently running the asylum, and that the damage they are inflicting is due to the fact that their reality and everyone else's reality are operating on mutually exclusive planes of existence, rather than from the execution of any grand conspiratorial plan. As for me, I'm a cynic.

Whichever view is correct, let's hope that the damage that is being done to the community banking industry is not so irreparable that it can't be fixed, staring with the off-year elections this November.

DAP: Please Just Die

Notwithstanding evidence that seller-funded downpayment assistance ("DAP" or SFDP") was demonstrably disastrous for the FHA (which is why Congress finally banned the practice), its proponents refuse to give up hope that the price-inflating, default-inducing DAP can rise from the grave. The latest redeemer wanna-be is Democratic Texas Representative Al Green (not the same Al Green who plagued the dreams of Ally McBeal). According to a recent story in BusinessWeek (hat tip to Housing Wire), Rep. Green is serious about pushing this bad idea forward.

A bill introduced by U.S. Representative Al Green, a Texas Democrat, and supported by the U.S. Conference of Mayors, would restart a program that allowed nonprofit groups to donate the 3 percent down payment low-income buyers needed to get FHA-insured mortgages. Sellers, often homebuilders, then contributed that amount, plus a fee, to the nonprofits.

The plan, which funded the purchase of more than 1 million homes over 10 years, was halted by lawmakers concerned about rising defaults and evidence that some buyers were overcharged. Those mortgages have soured at about three times the rate of other FHA-backed loans, according to agency data.

[...]

Green said he wants to revive the program with stricter screening and appraisals to reinvigorate the housing market. Doing so would put 300,000 families a year into homes, generating 235,000 jobs and more than $4 billion in tax revenue, according to AmeriDream Inc., a Gaithersburg, Maryland-based nonprofit that provided down-payment assistance in the past and supports Green’s plan.

“This is a program for decent, hardworking people,” said Green, a member of the House Financial Services Committee. “Don’t make the zip code where you’re born the determinant of wealth. The real question is not ‘Can the person make a down payment?’ It’s ‘Can they make the mortgage payment?’”

The bill has the support of 22 co-sponsors, including members of the Congressional Black Caucus and the Congressional Hispanic Caucus, both of which fought to keep the program.

In other words, major campaign contributors want Congress to resurrect a program that HUD estimates has cost it $14 billion in losses, losses that are backstopped by the American taxpayer. This will permit the FHA to once again insure loans to borrowers who have none of their own funds invested in the home they're purchasing, because builder-sellers have funneled the downpayment (incredibly small to begin with in the case of FHA loans) through non-profit community advocacy groups who are paid a "processing fee" by the sellers to "gift" to the borrower the downpayment advanced by the seller . HUD has convincingly shown that DAP FHA loans lead to higher prices and higher default rates.

The goal of putting more people in homes through hinky loans that a high number of borrowers will not repay makes perfect sense to...Al Green, sellers trying to sell homes, and non-profit groups that have sold themselves to builder-sellers who pay them fees to perpetrate this bad joke on the FHA. Of course "stricter screening and appraisal standards" will fix the basic problems of a concept is fundamentally flawed on its face. You believe that, right?

If you do, you'll be in the minority.

No amount of tinkering can save the program as long as sellers can contribute to the down payment and buyers have no capital invested, according to Lawrence Yun, chief economist at the National Association of Realtors in Washington.

“The whole structure is inherently fishy,” said Yun. “This was not a real arms-length transaction. There’s too much temptation for the seller just to increase the price to cover the contribution. The builders pushed this to try and increase sales, but the lender is left holding bag.”

The evidence that DAP FHA loans have been a disaster is overwhelming.

While seller-financed mortgages make up only 10 percent of those insured by the FHA from the beginning of 2001 to October 2008, they account for 31 percent of the agency’s losses during that period, or $3.8 billion, according to FHA data. The FHA estimated in November that the mortgages will cost it an additional $10.4 billion, almost wiping out the 2 percent loss reserves the agency is mandated by Congress to maintain.

About 13 percent of down-payment-assisted mortgages originated in 2004 have defaulted compared with about 4 percent of other FHA mortgages, according to agency data. The figures exclude mortgage re-financings.

[...]

Mark Everson, then Internal Revenue Service Commissioner, called down-payment-assisted mortgages “scams” in 2006 because of the way funds were passed from the sellers of homes to buyers through nonprofits.

“Organizations claiming to be charities are being used to funnel down-payment assistance from sellers to buyers through self-serving, circular-financing arrangements,” Everson said at the time. “So-called charities that manipulate the system do more than mislead honest homebuyers and ultimately jack up the cost of the home. They also damage the image of honest, legitimate charities.”

Supporters of DAP have cited a 2004 study by the Milken Institute to support the benefits of DAP. Unfortunately, that study has a wee bit of a problem.

The study’s lead author, Milken researcher Perry Wong, said he has since reversed his opinion.

“We’ve learned that to assume that if you just give someone a place in a community all sorts of good things will happen is wrong,” Wong said. “The model could work if you assist the buyer but not give the money away. The buyer has to have a stake.”

That's a problem that "tougher screening" and "stricter appraisal standards" can't address: skin in the game. If there's one thing that the problems we've seen with underwater residential mortgage loans over the last several years should have taught us is that when the buyer doesn't have it, he or she is more likely to walk away from the loan when times get tough.

Let's hope that this idea continues to slumber in the eternal rest that all bad ideas richly deserve and too seldom achieve.

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Two upcoming Bank Law Stuff webinars co-sponsored by Bank Business Advisors, LLC (in which this blog's author has a stake) may be of interest to readers. On January 27, 2010, Denver attorney (and Bank Business Advisors member) Tom Bieging and former banker and current banking consultant Larry Martin, principal of Bank Strategies, LLC, will present "Banks Under The Microscope: Today's 'Hot Buttons' For Bank Examiners." On February 3, 2010, Bank Business Advisors' John Walker will moderate a panel discussion with Larry Martin and Dan McDonald, Director of Loan Review Services at bank accounting firm Fortner, Bayens, Levkulich & Garrison, P.C., on the current and coming commercial real estate "freight train" and what its headlong rush down the tracks will mean for community banks.

DAP Was a Disaster

A year after it was shut down by Congress, the practice of builders paying non-profit consumer advocacy groups to funnel down payments in the form of "gifts" to buyers of homes from those same builders (buyers who financed the rest of the purchase price with an FHA-insured loan), a practice nicknamed "DAP" or "SFDP" (seller-funded down payment) has been revealed to be what the FHA and its bosses at HUD always claimed it was: an unmitigated disaster for the FHA. According to Brian Collins of National Mortgage News today (in a story we were unable to find in the main stream media), borrowers of such loans have been defaulting in droves.

The latest FHA actuarial report calculates the damage SFDP inflicted on the FHA Mutual Mortgage Insurance Fund in startling detail. If the government had never endorsed SFDP loans, the economic value of the MMIF would be $13.2 billion as of September 30 — instead of $3.6 billion — a difference of almost $10 billion. In other words, FHA would be in stronger financial shape today.

DAP was demonstrably disastrous long before this latest report. More than two years ago, the late Tanta of Calculated Risk blog fame analyzed the bad effects of the practice in a fashion that even members of Congress could understand. Of course, when consumer advocacy groups and home builders exert pressure on Congress, the facts can be ignored. Nevertheless, even Congress eventually got it right, after HUD failed to follow the Administrative Procedures Act.

On the bright side, the FHA report notes that at least DAP won't continue to drag down FHA on loans closed after the practice was finally banned. While that may be small comfort in light of the continued bleak economic outlook, at least the FHA won't be forced to choke down the type of bilge water that was generated by DAP. For that, the American taxpayers should consider themselves lucky.

Don't Do DAP, Says HUD's "Top Cop"

As Democrats in Congress gear up to push through the return of seller-funded downpayment assistance (DAP) for FHA loans in 2009, at least one "top cop" with plenty of skin in the game thinks that's a really bad idea. HUD's inspector general, Kenneth Donohoe, spoke to a recent SourceMedia Mortgage Fraud Conference recently about the impact of fraud on the subprime mortgage meltdown. While he thinks that putting as many mortgage fraudsters behind bars as the jails will hold will send a message to crooks, he also thinks that we may not have yet seen the worst of the fraud, although we've seen "the tip of the iceberg."

"I like to think we've finally seen the iceberg, but I'm still not sure," he said.

I like to think that when we've finally seen the iceberg, we're not sailing on the Titanic, but I'm still not sure.

What worries him even more than past fraud is what lies ahead.

The inspector general said that, given the depth of fraud, he is particularly worried about the ability of the Federal Housing Administration to undertake the heavy load of refinancings that lawmakers are asking the agency to handle, especially since "lenders are made whole, leaving the FHA to take the hit."

Of course, that's the plan: rescue the big lenders, particularly those in a swath from D.C. to NYC and a few choice spots elsewhere (Charlotte, North Carolina, for one), then socialize the losses. The rest of the banking business, and all of the mortgage borrowers, can fend for themselves. As for the FHA, the paln may be to make FHA loans "the new subprime."

Mr. Donohoe does see some hope, however, in a couple of recent events, one being the demise of seller-funded downpayment assistance for FHA loans.

Two recent actions that might save the FHA are an increase in penalties against anyone who acts to defraud the agency - up to 30 years in prison and $100 million in fines - and the prohibition of down payment assistance to borrowers from anyone who has a stake in the sale, according to Mr. Donohoe.

"Down payment assistance has been a magnet for all kinds of fraud schemes," he said. "If it was allowed to continue unabated, it would not have been just a nail in FHA's coffin, it would have killed it."

Unfortunately Ken, when it comes to killing the FHA, there's always next year. Even without Congress or DAP, "motivated" borrowers will always find a way, legal or not.

Have a nice Bird Day. See you next week.

Is Hope For Homeowners Hopeless?

Peter Miller of FHA Mortgage Guide thinks that "it's a disgrace" that the FHA's Hope for Homeowners program has thus far proved to be a flop. Well, not merely one of those routine flops, the kind that hits the ground with a gentle thud. No, thus far, the H4H plan has been the sort of flop that sounds like a watermelon hitting solid pavement after being dropped from the roof of a ten-story parking garage.

The latest numbers from HUD are stunning: For the first 15 days of October just 49 borrowers with delinquent conventional loans were able to refinance with FHA mortgages. That’s less than one per state.

While Miller points his finger in the direction of a hostile White House, Housing Wire thinks the real problems lie more with the fact that market participants think that the loan program stinks. Not only stinks, actually, but, as the weight lifters from Staten Island who roomed across the hall from me my freshman year in college used to designate a really bad idea, "stinks on ice."

In reality, servicers and investors are reportedly leery of taking the 13 percent haircut relative to current LTV needed to get into a H4H loan (that extra three percent is an up-front insurance premium).

Worse yet, smaller, independent mortgage bankers — the so-called mid-tier lenders in the mortgage origination market — now say they are finding it difficult to turn around and sell these refinanced loans to the large investors they work with on a consistent basis. Which means even if an investor or trustee agrees to take the loss and refinance a loan into the H4H program, there often isn’t a buyer on the other end willing to take the loan.

[...]

Most mid-tier lenders operate via warehouse lines of credit: if they aren’t allowed to push the refinanced, FHA-insured, Hope for Homeowners loan through an available warehouse line, they can’t fund the deal, regardless of what happens on the front end of the process.

For their part, potential buyers appear hesitant to acquire what they see as the high risks associated with these refinanced debts, since participation in the program typically requires borrowers to be delinquent in the first place, according to one independent mortgage banker who asked not to be named in this story. “It seems to us like they created a great program but nobody’s willing to step up to the plate and take a lead on it, to extend this to borrowers,” the source said.

It appears that while lenders are willing to consider a H4H haircut on loans in their own portfolio, they're not ecstatic about providing funding for wholesale channels to originate loans to borrowers who are poor credit risks and who aren't already indebted to the lender. This may be a temporary condition, or it may be an early indication that "Hope For Homeowners" will soon be renamed " False Hope For Homeowners."

No Matter How Hopeless, Fight On

The opponents of tax anticipation loans are not giving up their fight (paid subscription required) to restrict those loans, notwithstanding the recent ruling of the US Sixth Circuit Court of Appeals that held that state laws that limit tax preparers who originate such loans are preempted by federal law when the tax preparers are originating the loans on behalf of national banks.

Chi Chi Wu, a staff attorney for the National Consumer Law Center in Boston, said groups like hers would continue to call for restrictions on these loans, because they have "triple-digit APRs." Ms. Wu wrote an amicus brief for the case on behalf of the state of Connecticut. Consumer advocates are paying particularly close attention to a proposal the Internal Revenue Service made in January that would prohibit tax preparers from disclosing or using taxpayer return information for the purpose of marketing refund anticipation loans. That proposal is still in the public comment period.

Expect the wars against these bottom-feeding loans to rage on. Incidentally, Ms. Wu's cousin, Cha Cha, opted to give up the fight and audition for "Dancing With The Stars."

Equally determined to never say "never" are advocates of seller-funded downpayment assistance (DAP) for FHA loans. Yesterday was the first day that DAP was effectively zapped by the Housing and Economic Recovery Act. In an article in yesterday's "Housing Wire," reporter Diana Golobay almost sang "Ding, dong, the DAP is dead."

It’s official. Down payment assistance — DAP or DPA to most industry participants — has gone the way of the Tyranosaurus Rex, independent Wall Street investment banks and the even textbooks that once suggested Pluto as the outermost planet in our solar system. That is to say that DPA is no more, effective today.

Well, I don't know about T. Rex being kaput. Plenty of associates in major law firms would say that their firms' managing partners are dinosaurs and that they're unfortunately alive and kicking.

The proponents of DAP--the nonprofit corporations that were paid a fee by homebuilders to launder pass-through the "donated" downpayment assistance through to the homebuyer/borrower--are also trying to sound Churchillian.

Nonprofit groups, including giants such as Sacramento-based Nehemiah Corp. of America, are now either out of business or looking to other lines of business while they continue to lobby Congress to reinstate the controversial FHA program. Efforts to pass a bill that would reinstate DPA stalled in a House committee, however, as concern over a historic financial bailout package pushed down payment program concerns to the back burner in the past few weeks.

Nehemiah hosted a media teleconference Wednesday that saw company president and CEO Scott Syphax vow to fight for the restoration of the program.

“It ain’t over yet,” said Syphax. “Regardless of the outcome in the next 48 hours or so, we will continue to press forward on behalf of the interests of working-class families and the communities they reside in across the country.’”

Yep, that's what we need right now: mortgage loans, backed by federal insurance, with a much higher default rate. Good luck, Scott!

Any Hope for Hope for Homeowners?

There are only two weeks to go until the event we've all been waiting for hits the mortgage world like Ike (the hurricane, not the dead president): The Hope for Homeowners Program.

At yesterday's hearing before the House Financial Services Committee, representatives of the nation's largest mortgage loan servicers were giggling like school girls and making goo-goo eyes at cute young male interns as a hormonal rush of pure ecstasy consumed them when they contemplated the impact of this once-in-an-epoch solution to all that ails the mortgage market. Oh, sorry, that was Barney Frank eye-balling the interns, not the mortgage servicing reps.

According to Housing Wire, the mortgage services were filled with inertia and not unbridled hope at the prospects of Hope for Homeowners.

The emerging consensus among those in the servicing trenches that spoke with HW, however, has been that the program will have less impact than legislators might hope. And that was clearly the undercurrent in committee testimony Wednesday from servicing executives, evident as much in what was said as it was in what wasn’t.

Steven Hemperly, senior vice president of real estate default servicing at CitiMortgage, Inc., went so far as to only mention the Hope for Homeowners program in his closing remarks to committee chairman Barney Frank (D-MA) and other House members. His only mention of the program: “We look forward to the initiation of the Hope for Homeowners program and view it as a useful lending and servicing tool for struggling borrowers.”

While affirming Wells Fargo’s commitment to loss mitigation, execitive vice president Mary Coffin estimated that 30,000 to 40,000 borrowers might qualify for the Hope for Homeowners program. “We will use this program where it is needed,” she told House members.

Other servicers provided similar estimates, but said the total number of loans pushed to the program would likely end up being lower. “We do believe, based on our experience of the last year and a half, that the numbers of borrowers who ultimately take advantage of the program could be lower than the number that preliminarily qualify, as there may be several crucial barriers to the program’s widespread use,” said Molly Sheehan, a senior vice president at Chase Home Lending.

Bank of America loss mitigation head Michael Gross was the only servicer that noted that the company — which now owns mammoth Countrywide Financial’s mortgage servicing portfolio, and is the largest servicer in the nation — had actively engaged in forbearances thus far for borrowers the company believes will qualify under the program.

“We are proactively contacting these customers to confirm their eligibility for, and interest in, participating in the program,” Gross said. “Subject to investor consent and state procedural considerations, we will avoid completing foreclosure sales for the customers identified while the implementing regulations are being drafted.”

It figures that Bank of America would be blowing air kisses to the Committee. It's strapped on a Hazmat suit and is trying to clean up Countrywide's toxic waste. Even a program as weak as Hope for Homeowners is appreciated, even if all it does is waft a whiff of "eau du rose-colored-glasses" over a field of rotting beached whale carcasses. After all, when it comes to federal legislation, it's the thought that counts, right?

As noted by Housing Wire's Paul Jackson, a big damper on the servicers' sense of enthusiasm might be the fact that with only of a couple of weeks to go, HUD hasn't released the details about how the program will work. Knowledgeable readers will recall that HUD initially announced that it would take until next October to get the rules issued, and only backed down when folks like Barney Frank and Chris Dodd threatened to sever HUD's body parts with a rusty razor; and not in a nice way, either. It's not surprising that if in August you think it will take a year to implement the program, only 30 days later you might still be scrambling like John Edwards after a passing ambulance to get the rules in place. Perversely, I hope that HUD's not up and running on October 1, because I simply like to watch cage fighting, especially when it involves politician versus bureaucrat in a grudge match to the death. There's always the hope that both will be maimed.

A major fly in Hope for Homeowners' mortgage burn ointment is the problem of junior lienholders who ask, quite correctly, "What's in it for me?"

HUD’s [Brian] Montgomery also alluded to perhaps the program’s largest sticking point: second liens. “One of the greatest challenges to successful loan modifications is obtaining the consent of all existing lien holders, including the holders of junior mortgages,” he said. He suggested HUD was close to proposing rules under the HFH program that would have second lien holders share in the government’s interest in the property.

That is clearly something that doesn’t sit well with first lien holders, particularly on portfolioed loans. Chase’s Sheehan said that “it seems counter intuitive that the second lien holder moves into a favored position in sharing future appreciation.”

“We believe it would enhance the success of the program were a similar incentive provided to the first lien holders,” she suggested. First lien holders must write-off significant principal on a troubled loan — down to 90 percent of current LTV — and must contribute the borrower’s initial 3 percent FHA mortgage insurance premium.

Montgomery also warned that loans under FHA’s Hope for Homeowners program would have a higher interest rate than other comparable loan programs — which would certainly seem to undermine the program’s intent to make mortgages more affordable for troubled borrowers.

“Given the distressed nature of the borrowers likely to participate in the program, as well as the 1.5 percent annual mortgage insurance premium mandated for HOPE for Homeowner loans, early indications are that HOPE for Homeowner loans likely will have a higher interest rate than other FHA-insured products, including FHASecure, because they will cost more than standard FHA loans,” he said.

This program looks like it's going to storm out of the gate like Secretariat on steroids, doesn't it?

We'll see, soon enough.