Last summer, after several months of negotiations and debate, Congress passed a housing bill aimed at easing the mortgage foreclosure crisis. One part of the sweeping bill was designed to help homeowners who were having trouble with their high-rate mortgages refinance with lower-cost, government-backed loans.
But the program, called Hope for Homeowners, has gone largely unused, and a House committee on Tuesday holds a hearing to find out why.
The issue serves as a cautionary tale on the limits of government's ability to deal with the complex subprime lending crisis.
When the Senate began debating the Hope for Homeowners program last spring, Senate Banking Committee Chairman Chris Dodd (D-CT) was, well, full of hope for the program.
"This Hope for Homeowners Act, I believe, will give us a positive confidence-building measure that will allow people to remain in their homes where appropriate and, secondly, allow us to get to a bottom I hope and a floor where capital will flow again," Dodd said at the time.
Low Expectations, Tough Rules
By the time the measure was approved last summer, the expectations were already modest. Congressional analysts forecast that just 400,000 mortgage owners would be served by the program. But even those low expectations proved optimistic.
There have been only 451 applications, and only 25 loans have closed since the program started in October, says Meg Burns of the Federal Housing Administration, which is in charge of implementing the program.
There are several reasons that the numbers of participants are low. It's not a great deal for homeowners. Loan fees and interest rates are high. Borrowers have to provide two years' worth of financial records and certify they did not provide misleading information to bankers. Lenders, meantime, have to be willing to take a loss on their existing loans. And if the value of a house increases, homeowners have to share that equity with the government.
John Taylor heads the National Community Reinvestment Coalition, a housing advocacy group.
"You have to give 50 percent of all you've earned even though you've paid off the loan at high rates to the federal government, so you can see why I say I think they sat down with Tony Soprano to design the original program," Taylor says.
A Product Of Compromises
While no loan sharks are believed to have taken part in drafting Hope for Homeowners, the bill was a product of compromises between Democrats in Congress and the Republican Bush administration. There were many political trade-offs between conservatives who wanted tough safeguards and liberals who wanted greater access to the program.
Rep. Barney Frank of Massachusetts (D-MA), who helped draft the original bill, admits it has its flaws.
"What is says is if you have problems of unprecedented magnitude and difficulty, human beings don't always get it right the first time. Is that a surprise to anybody?" Frank says.
Frank says that while the government may have mishandled its first approach to the problem, the subprime crisis was brought on by decisions in the private sector. Frank, who chairs the House Financial Services Committee, is unveiling a proposal Tuesday to rework parts of Hope for Homeowners to relax some provisions that were aimed at preventing abuse.
Frank's bill would lower the program's fees and interest rates. He's optimistic that this time, the government will get it right.