Renewed HOPE for Homeowners

NEW YORK (CNNMoney.com) -- One of the biggest disappointments of the foreclosure prevention fight has been HOPE for Homeowners, a plan Congress passed in an attempt to help as many as 400,000 underwater, delinquent borrowers from going into foreclosure.

In its first seven months, HOPE for Homeowners helped one family stay in its home.

Congress and the Obama administration are hoping to do a lot better than that.

On Wednesday, President Obama signed into law a bill that attempts to correct the program's problems. The president said the program had many provisions that discouraged servicers from using it.

"This bill removes those hurdles," Obama said.

The original bill, which took effect Oct. 1, was intended to help defaulting homeowners by having banks voluntarily reduce mortgage balances to 90% of a home's current market value. The loan would then be refinanced into a mortgage insured by the Federal Housing Administration (FHA).

The idea was that the lenders take "haircuts" and the government would then bail them out of any future losses by insuring the new loan.

As a result, most of the big lenders didn't offer the program, which was strictly voluntary though heavily encouraged by the Bush and Obama administrations. "The lender basically short-sells the mortgage into the plan, and there's no more chance for upside," said Tom Kelly, a spokesman for JP Morgan Chase (JPM, Fortune 500).

The new version of HOPE sweetens the FHA-refinance option - for lenders. It only requires servicers to reduce balances to 93% of market values instead of 90%. It also pays servicers $1,000 for every Hope-refinanced loan.

For example, borrowers who owed $220,000 on a house valued at $200,000 would need their mortgage balances reduced to $180,000 to qualify for an original HOPE for Homeowners refi. That's a $40,000 writeoff. Under the new plan, lenders would have to forgive $34,000.

But the biggest change is that it authorizes FHA's parent agency, the Department of Housing and Urban Development (HUD), to share future home-price appreciation with investors, up to the appraised value of the property when the existing loan was first issued.

The original bill gave HUD the right to share potential profits 50/50 with homeowners, but now some of HUD's share would go to the original investors.

Also certain to increase servicer utilization of HOPE for Homeowners is a change in Treasury Department policy announced late last month. Treasury will require any servicer that signs up to participate in the Making Home Affordable program, the administration's mortgage modification plan, to evaluate borrower eligibility for Hope for Homeowners as well.

If borrowers don't fit into the Making Home Affordable program but are viable for HOPE, the servicers must offer them this option.

Industry insiders say they hope the changes will spur more lenders to use the plan.

"It's very important that it becomes a better program," said Faith Schwartz, director of Hope Now, a coalition of lenders, servicers, mortgage investors and community advocates. "We need the FHA to provide another outlet for refinancing these problem loans."

The final bill removed a provision that would have authorized bankruptcy court judges to lower mortgage balances to reflect current market values. Supporters of this "cramdown" believed it would pressure lenders into making more affordable modifications for at-risk borrowers. But the Senate removed that from their version of the bill and the House followed suit.