By ALAN ZIBEL
The Associated Press
Thursday, February 25, 2010; 3:48 PM

WASHINGTON — Lawmakers are taking aim at the Obama administration’s struggling mortgage assistance program, with Republicans calling it a worthless exercise and Democrats saying it doesn’t go far enough.

In a report Thursday, Reps. Darrell Issa, R-Calif. and Jim Jordan, R-Ohio., called the program a misuse of taxpayer money. Though $75 billion has been set aside for the program, so far only $15 million has been spent.

They also said it distorts the housing market by keeping people in their homes who would be better renting.

“Many Americans are throwing their money into homes that they believed the government would help them keep, only to find out thousands of dollars later that they will face foreclosure anyway,” Jordan said at a House hearing.

Obama administration officials, however, say the program gives a second chance to homeowners who were given shoddy loans during the housing boom. And they defend their track record, even though only 116,000 homeowners have completed the process out of the 1 million enrolled since the program’s launch last March.

While “challenges remain”, the program “is helping homeowners who have faced real financial hardship,” said Phyllis Caldwell, chief of the Treasury Department’s homeownership preservation office.

Democrats, however, argued that the Treasury Department needs to put more pressure on the lending industry to reduce borrowers’ outstanding principal balances

The program is designed to lower borrowers’ monthly payments by reducing mortgage rates to as low as 2 percent for five years and extending loan terms to as long as 40 years. To complete the process, homeowners need to make three payments and provide proof of their income, plus a letter documenting their financial hardship.

But experts warn that hundreds of thousands of borrowers will not complete the process because they are found to be ineligible during an initial trial phase. Housing counselors complain that many homeowners remain stuck in limbo without final word on their applications

Treasury officials acknowledge that the treatment of borrowers under the program has been a problem. They have been working on new consumer protections such as giving those rejected from the program 30 days to appeal the decision and barring lenders from lenders continuing with foreclosures while homeowners were being evaluated for help.

Last week, President Barack Obama announced that housing agencies in Arizona, California, Florida, Michigan and Nevada will receive $1.5 billion in financial rescue money. The funds will go to local programs to help unemployed homeowners, “under water” borrowers who owe more than their home is worth, or pay lenders to assist borrowers with second mortgages.

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Hocking the house for quick cash is a lot harder than it used to be, and it’s causing headaches for homeowners, banks and the economy.

During the housing boom, millions of people borrowed against the value of their homes to remodel kitchens, finish basements, pay off credit cards, buy TVs or cars, and finance educations. Banks encouraged the borrowing, touting in ads how easy it is to unlock the cash in their homes to “live richly” and “seize your someday.”

Now, the days of tapping your house for easy money have gone the way of soaring home prices. A quarter of all homeowners are ineligible for home equity loans because they owe more on their mortgage than what the house is worth. Those who have equity in their homes are finding banks far more stingy. Many with home-equity loans are seeing their credit limits reduced dramatically.

The sharp pullback is dragging on the economy, household budgets and banks’ books. And it’s another sign that the consumer spending binge that powered the economy through most of the decade is unlikely to return anytime soon.

At the peak of the housing boom in 2006, banks made $430 billion in home equity loans and lines of credit, according to the trade publication Inside Mortgage Finance. From 2002 to 2006, such lending was equal to 2.8 percent of the nation’s economic activity, according to a study by finance professors Atif Mian and Amir Sufi of the University of Chicago.

For the first nine months of 2009, only $40 billion in new home equity loans were made. The impact on the economy: close to zero.

“The home as ATM is yesterday,” says Keith Gumbinger, vice president of HSH Associates Financial Publishers, which publishes consumer loan information.

Millions of homeowners borrowed from the house to improve their standard of living. Now, unable to count on rising home values to absorb more borrowing, indebted homeowners are feeling anything but wealthy.

Holly Scribner, 34, and her husband took out a $20,000 home equity loan in mid-2007 — just as the housing market began its swoon. They used the money to replace sinks and faucets, paint, buy a snow blower and make other improvements to their home in Nashua, N.H.

The $200 monthly payment was easy until property taxes jumped $200 a month, the basement flooded (causing $20,000 in damage) and the family ran into other financial difficulties as the recession took hold. Their home’s value fell from $279,000 to $180,000. They could no longer afford to make payments on either their first $200,000 mortgage or the home equity loan.

Scribner, who is a stay-at-home mom with three children, avoided foreclosure by striking a deal with the first mortgage lender, HSBC, which agreed to modify their loan and reduce payments from $1,900 a month to $1,100 a month. The home equity lender, Ditech, refused to negotiate. Scribner’s husband, Scott, works at an auto loan financing company but is looking for a second job to supplement the family’s income.

The family is still having trouble making regular payments on the home-equity loan. The latest was for $100 in November.

“It was a huge mess. I ruined my credit,” Holly Scribner says. “We did everything right, we thought, and we ended up in a bad situation.”

It’s a mess for the banking industry, too.

Home equity lending gained popularity after 1986, the year Congress eliminated the tax deduction for interest on credit card debt but preserved deductions on interest for home equity loans and lines of credit. Homeowners realized it was easier or cheaper to tap their home equity for cash than to use money taken from savings accounts, mutual funds or personal loans to fund home improvements.

Banks made plenty of money issuing these loans. Home equity borrowers pay many of the costs associated with buying a home. They also may have to pay annual membership fees, account maintenance fees and transaction fees each time a credit line is tapped.

In 1990, the overall outstanding balance on home equity loans was $215 billion. In 2007, it peaked at $1.13 trillion. For the first nine months of 2009, it’s at $1.05 trillion, the Federal Reserve said. Today, there are more than 20 million outstanding home equity loans and lines of credit, according to First American CoreLogic.

But delinquencies are rising, hitting record highs in the second quarter. About 4 percent of home equity loans were delinquent, and nearly 2 percent of credit lines were 30 days or more overdue, according to the most recent data available from the American Bankers Association.

A rise in home-equity defaults can be particularly painful for a bank. That’s because the primary mortgage lender is first in line to get repaid after the home is sold through foreclosure. Often, the home-equity lender is left with little or nothing.

Banks are applying the brakes.

Bank of America, for example made about $10.4 billion in home equity loans in the first nine months of the year — down 70 percent from the same period last year, spokesman Rick Simon says. The also started sending letters freezing or cutting lines of credit last year, and will disqualify borrowers in areas where home prices are declining.

“This was just solid risk management,” he says.

Jeffrey Yellin is in the middle of remodeling his kitchen, dining room, living room and garage at his home in Oak Park, Calif. He planned to pay for the project with his $200,000 home equity line of credit, which he took out in January 2007 when his house was valued at $750,000.

In October, his lender, Wells Fargo, sent a letter informing him that his credit line was being cut to $110,000 because his home’s value had fallen by $168,000, according to the bank.

He is suing the bank, alleging it used unfair standards to justify its reduction, incorrectly assessed the property value, failed to inform customers promptly and used an appeals process that is “oppressive.” Jay Edelson, a lawyer in Chicago who is representing Yellin, says homeowners are increasingly challenging such letters in court. He says he’s received 500 calls from upset borrowers.

Wells Fargo declined to comment on Yellin’s lawsuit but said it reviews of customers’ home equity lines of credit to make sure that account limits are in line with the borrowers’ ability to repay and the value of their homes.

“We do sometimes change our decisions when the customer provides sufficient additional information,” Wells Fargo spokeswoman Mary Berg said in a statement e-mailed to The Associated Press.

Work has stopped at the Yellin’s home. The backyard, used as a staging area for the remodeling job, is packed with materials and equipment.

“Now, I’ve got a backyard that looks like ‘Sanford and Son’ almost,” he says.

ADRIAN SAINZ

AP Real Estate Writer

PJ Wade

Anyone who has hit a speed bump knows there’s a right way and a wrong way to take this arbitrary, often irrational, obstacle to your intentions. The recession is a speed bump, a big one, but just a speed bump. If it is taken the right way, it will not be a barrier to a satisfying future, but a springboard — your choice.

If you use the recession as an excuse for anything, you’ll lose. If you decide to let these “down” times help you get ahead of those who seemed miles in front of you during the boom, you’ve got your mind in the right gear. It’s not the recession, it’s your reaction that matters.

If you don’t like my metaphors for the opportunity that lies ahead, discover your own. Let the shock and grief wear themselves out as quickly as possible, and then ask yourself, “How are things different for me now?” Don’t let this economic equalizer go by without stopping to think about what has really happened.

In this column, we’ll continue to zero in on real estate, home, small business, communities and related relevant decisions to share views on why this could be a significant, productive time in your life. As futurist and strategist, my perspective is not limited to this vital slice of life or the economy, so realize that what is said here can be extrapolated into many parallel and overlapping areas.

Reinventing your lifestyle or SOHO business may require a new way of thinking at some, or all levels, and in the way you make repeated and one-of decisions. For many real estate buyers and owners, the problem has been following, not thinking for themselves. The New Year offers an excellent example of what is meant by this.

Western society promotes the custom of making New Year’s resolutions to start the year on the right foot. These statements often become self-defeating illusions that can reinforce one’s sense of powerlessness over change. By now most, if not all, of your resolutions have faded, unachieved, into the past. This may have convinced you that change is beyond your control.

Resolutions are publicly-declared attempts at abrupt personal change. They initially create the illusion of progress and a fresh start. When resolutions crumble, they can leave a publicly-humiliating sense of failure, a negative view of a fresh start. The dire predictions and consequences attached to the recession have robbed many from even the illusion of a clean slate as the year begins.

Success with self-directed change lies in striking a balance between society’s customs and proven methods for self-discipline and personal improvement. For instance, our culture emphasizes beginnings as essential for change—start of the year, first of the month, beginning of the week. These are artificial markers. Try the month you’re in, the 14th, a Friday, or the end of something. Does waiting improve success? What’s wrong with now? Resolvers who succeed with their goals do so because of the way they approach the task, not because of the date they begin.

Start now as you read. What do you want to change—pay cash instead of using credit, make more than the minimum monthly payment on your mortgage, finish each home maintenance task you start…what home ownership patterns would create benefit if you varied them?

How can you be sure to stick with the improvement you’ve decided on? Attitude.

Most people try to think themselves into change, but the best way to maintain a new behaviour is to act as it the improvement has been made and you’re just continuing on. Make a positive statement that embodies the goal, and keep repeating it. Believe you’ve made the change, and act accordingly. Say to yourself: [bullet] I pay cash, or wait ’til I can. [bullet] I will own my home “X” days or “X” dollars earlier. (Use an online mortgage calculator to determine what you can save with even small payments, and you’ll become driven.) [bullet] I’m building equity, sale-ability and choice with each property-management task I successfully complete.

Fine-tune your behaviour as you go, and take on new home-equity building or value-appreciation tasks. You’ll stay ahead of market trends and continue to ensure your real estate is working for you as an increasingly valuable and useable asset, not a burden. You’ll find your value system readjusts to make this a permanent way of acting, probably before you’re completely aware of the new you.

I can hear, “Yeah, but what if I can’t resist the old ways”—racking up credit card debt, borrowing to make the minium mortgage payment, watching YouTube goofs or gaming instead of looking after what I own. Sliding back into well-worn habit ruts does not cancel out success. The conscious effort to correct yourself makes success sweeter. Just stop the old habit immediately and put things right. Return the indulgent purchase. Review the budget for extra mortgage loonies. Turn off the electronics and build some sweat equity in the real estate that houses your future.

Inventor Thomas Edison “failed” his way to success along with countless other high achievers, so why can’t you? “Onward & Upward” is my reminder that investing in “now and next” is more useful than whining over what was or should have been.

Yes, fasten your seat belt, you’re in for a bumpy ride, but you can still reach your destination. Where are you headed in 2009?

Rent-to-own options are becoming popular again after falling out of favor during the last couple of decades when mortgages were easy to get.

The advantages of rent-to-own to buyers include a way around poor credit, an opportunity to rebuild credit worthiness and a way to try out homeownership without making a costly commitment.

For sellers, it offers cash flow from properties that might otherwise just be sitting there.

In some parts of the country, like Florida, rent-to-own arrangements are fairly commonplace, but in other parts of the country developers are only beginning to experiment with this form of purchase.

In the Boston area, Economic Development Financing Corp. (EDFC) and Trinity Financial are two affordable-home developers that have introduced experimental rent-to-own programs. Eric Gedstad, spokesman for MassHousing, a state agency that finances housing construction, says his agency is supportive.

“As the lender, we are gratified that the developer has cash coming in. It makes sense for potential homeowners. The more time that goes by the better the opportunity for someone to repair his credit.”

Source: Boston Globe, Robert Preer (08/31/2008)