Federal mortgage assistance going away?

By Karoun Demirjian

Sunday, March 13, 2011 | 3 a.m.

The House of Representatives passed two bills to rescind federal funding for mortgage modification programs last week, the first steps toward getting the government out of the home lending business.

Government-backed mortgage giants Fannie Mae and Freddie Mac were implicated in the subprime housing bubble that burst in 2008. And when the economy stalled, it was the federal government that swept in promising a recovery through programs to help underwater borrowers with their mortgages.

If the House Republican leadership’s campaign against government involvement is successful, then those promises won’t be fulfilled. And though Nevada is still reeling from the worst foreclosure crisis in the country, the cavalry won’t be coming.

But for underwater homeowners in the Silver State, that news is more the death of an unrealized dream than a punch in the gut.

The repeal of the Emergency Mortgage Assistance Program, which Nevadans aren’t eligible for, and the Federal Housing Administration’s refinancing option, which Nevadans haven’t taken advantage of, aren’t expected to shock the system.

“The programs are not working for our state,” said Rep. Dean Heller, R-Nev., who voted for pulling the almost $9 billion in unspent funding set aside for those initiatives. “Many federal programs were created with good intentions, however, we must have the courage to eliminate the programs that do not work.”

But it’s not just about what the House stripped away last week, or is expected to in the coming days, when lawmakers set their sights on the Making Home Affordable Program.

Even the White House appears to think it’s time to start talking about extracting the federal government from home lending, according to a white paper the administration released last month outlining the phaseout of Fannie Mae and Freddie Mac.

Taken together, Fannie Mae, Freddie Mac, the FHA and Veterans Affairs account for about 80 percent of all loans that originate in the United States.

“Generally, it’s not good to have the federal government so involved with these sorts of private transactions,” said Nasser Daneshvary, a professor of economics at UNLV. “But I don’t think the private sector alone, without the federal government, can resolve a crisis like this.”

It’s a bedeviling dilemma: Declare the subpar federal intervention a failure, cut losses and let the economy crash; or sustain an untenable system in the hopes that revamping thus-far ineffective programs will lift the state out of its present mess.

“The programs have not worked as we expected that they would,” said Rep. Shelley Berkley, D-Nev., who voted against the House bills. “But that doesn’t mean you throw them aside. We need to fix them so that they do what they were intended to do.”

Rep. Joe Heck, R-Nev., the only Republican to vote to preserve the FHA program, said: “A failed P.R. job should not be the reason a good program dies.”

Part of the conundrum in Nevada is that underwater loans here are so far underwater that even the federal government refuses to touch them.

Under the Making Home Affordable program, homeowners can’t qualify for refinancing if they owe more than 115 percent of what their homes are worth.

In Nevada, where more than 60 percent of all home loans are underwater, the average loan is more than 140 percent of home’s value. Although more than 14,000 home loans have been modified, Nevada enjoyed only a 2.6 percent success rate under the federal government’s premiere mortgage modification program.

Plenty of factors have contributed to such low success rates, experts say. First of all, the federal government requires a lot more paperwork than subprime lenders did. And, not everybody knew about the options.

But the chief factor has been disappointment.

“Expectations were exceptionally high for all of these programs,” said Lon DeWeese, CFO of the Nevada Housing Division. “But the modification programs only allowed for two forms of change: Lower the interest rate, or extend the amortization period to bring down the overall monthly payment. What it never did was reduce the total amount owed to the investor.”

Those options did reassure banks that they’d eventually be paid, but weren’t much incentive for homeowners wondering if their investments would ever be worth what they owed.

“The flexibility of the system broke down,” DeWeese said. “People didn’t understand that they’re still going to end up paying out the same amount of cash the investor was originally entitled to.”

There, the federal government doesn’t offer a helping hand, so many strategically chose foreclosure instead of seeking help.

“They say, ‘what am I going to lose? My credit is going to be damaged for a few years. But there are so many of us in these straits, the credit agencies will eventually have to forgive us,’” Daneshvary said. “Morally, I would not do it myself, but economically I do not blame them.”

With few other options, Nevada has put most of its hope for recovery behind the Hardest Hit fund, under which the state has received about $150 million.

Along with California and Arizona, Nevada recently struck a deal with Bank of America in which the states arbitrate between borrowers and banks, using federal funding to knock money off loan principals. Hardest Hit funding can also be used for short-sales, deals in which banks let homeowners sell for less than what’s owed.

Hardest Hit works on the rationale that banks lose money, time and home value through the foreclosure process,

DeWeese explained. For a state such as Nevada, which can’t make much use of the other modification programs, it may also be the only hope to address the underwater home loan problem.

But even Hardest Hit isn’t truly helping the hardest hit because to work, the deals have to bring mortgages to within that 115 percent-of-value level — and the funding is limited.

For now, there’s time to work out the kinks: Hardest Hit is not expected on the House’s chopping block anytime soon, and in the Senate, Majority Leader Harry Reid, who is intent on keeping all assistance options for his state’s housing and employment crises on the table, is likely to block most, if not all of these repeals.

But with House Republicans’ opening shots, Nevadans are speculating as to what Washington’s eventual withdrawal will mean for the culture of homeownership in the state.

“All these programs were made on the idea of the American dream,” Daneshvary said. “Less ownership, more rental would be the consequence.”

And a drag on housing prices. The 30-year mortgage was essentially a creation of Fannie Mae and Freddie Mac; if loans are left to the purview of private banks, 20-year mortgages are likely to once again become the norm, and less financing for purchasers means lower asking prices.

Locally, people are saying they can’t withstand more stresses, even if what’s currently available is imperfect.

“If these programs go away, it would cause a ripple effect,” said former state Assembly Speaker Barbara Buckley, who said federal government programs are the only thing pressuring banks to pursue alternate refinancing strategies.

“But if we were allowed to design the programs locally, they would be more successful. One size does not fit all.”