US retail banks are keen to take advantage of a government scheme which gives banks the option to refinance delinquent mortgages, but are unlikely to be ready to launch in time for its October start date. The Hope for Homeowners Act of 2008 – an extension of the Federal Housing Administration’s FHASecure scheme – creates a voluntary programme that would permit the FHA to refinance up to $300 billion in loans, around 1.5 million mortgages. The FHA, a government vehicle for insuring mortgages, would provide guarantees on refinanced loans to assist at-risk borrowers in gaining viable mortgages, helping the banking industry take fewer loans into foreclosure and potentially reducing bank costs.

The refinancing package has been identified as a key element in improving conditions in the US mortgage market, and was scheduled to be implemented at the start of October. But banking industry players say that deadline appears ambitious, with concrete guidelines not yet established. The programme will give banks the option to write down mortgage loans at risk of default to 87 percent of the current value of the property (90 percent, minus a 3 percent origination fee), rather than start the foreclosure process. This allows banks to refinance and insure the loan through the FHA and provides the borrower with a more serviceable loan, potentially avoiding default. The FHA charges an annual fee of 1.5 percent, rolled into the homeowner’s repayments.

The restrictions on the scheme are that the mortgage has to have been originated on or before 1 January 2008; and borrowers must have a mortgage debt to income ratio of not less than 31 percent. Borrowers must also certify they have not intentionally defaulted on their existing mortgages. The scheme will end on 30 September 2011. The legislation requires a board of directors, including representatives from various US banking-related regulatory bodies, establish the remaining criteria to implement the legislation. It is part of the Housing and Economic Recovery Act of 2008, which includes the new government position on Freddie Mac and Fannie Mae (see: Can US bail-out save Washington Mutual?).

American Bankers Association president Edward Yingling said: “We will encourage our members to participate in the Hope for Homeowners programme when it becomes active. Feedback from our members bolsters our belief members will use this important new tool.”

The banking industry’s enthusiasm for the programme is likely to depend on some of the finer detail of the programme. A spokesman for JPMorgan Chase told RBI the eligibility criteria for borrowers needs to become more explicit. Another industry concern is the level of sharing in any future house appreciation.

He said: “It is an important thing, but the FHA have to come up with rules on what the qualifying standards will be. Do the borrowers have to be delinquent or can they be current? What is the debt to income ratio they need to qualify? Those are coming out in the next few weeks… I think that means nobody is going to be doing it on October 1.”

Steps have already been made to reduce foreclosures through the FHASecure scheme. In the year since its launch it refinanced a total of around $104 billion in mortgages, helping 325,000 people to access more affordable loans. Hope for Homeowners should widen the options to both banks and homeowners.

Other initiatives have included HOPE NOW, an alliance of councillors, servicers, investors and lenders including Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and HSBC Finance. Over 2 million foreclosures have been prevented since it was set up in July 2007 through the use of repayment plans and loan modifications by members, according to the organisation.

HELOC loans feel pinch

The ‘Great American Piggybank’ known as the home equity line of credit – or HELOC – is drying up, another victim of the housing fallout. Largely responsible for the massive rise in US consumer debt, Americans tapped their homes for everything from vacations to college tuition.

Second-quarter home equity nonaccruals at commercial banks nationwide increased 165 percent from a year earlier, to $4.6 billion, according to a Foresight Analytics analysis of Federal Deposit Insurance data. The overall delinquency rate nearly doubled, to 2 percent. Banks with more than $100 billion of assets had the sharpest increase in nonaccruals, 179 percent, and the highest delinquency rate, 2.2 percent. Non-accruals increased 101 percent for banks with $10 billion to $100 billion of assets, 124 percent for those with $1 billion to $10 billion, and 90 percent for those with under $1 billion.

Overall, the amount of money US homeowners pulled out of their houses has fallen to a four-year low, a reflection of tumbling values and tighter standards by banks and other lenders. About $68 billion in home equity was “cashed out” by homeowners during the first half of 2008, the lowest amount since 2004, Freddie Mac said.

The great irony of the home equity lockdown is that these loans remain the safest bankers have in their portfolios. A mere 1.1 percent of HELOCs were 30 days or more past due as of the first quarter, the most recent period for which figures are available, reported the American Bankers Association. That compares with a 3.1 percent delinquency rate for auto loans and 4.5 percent for credit cards.