- The Washington Times - Friday, March 21, 2008

The Bush administration is considering a radical approach to alleviate the foreclosure crisis by helping homeowners refinance homes that have fallen in value while protecting the government against losses on the loans.

Home prices already have fallen 10 percent on average nationwide from their 2006 peak, and are down much more in cities like Miami and Las Vegas. Housing and Urban Development Secretary Alphonso R. Jackson said a proposal he sent to the White House would enable the Federal Housing Administration (FHA) to insure 80 percent of a loan’s face value in markets where home prices are falling, instead of providing the usual 100 percent guarantee.

Homes generally cannot be refinanced when their market price falls below the face value of the loans, and that has become a major reason why thousands of people are choosing to abandon their homes. An estimated one in 10 Americans now live in homes that are “under water.”

The HUD secretary said yesterday he understood how some homeowners facing foreclosure might not have been aware of all the terms of their mortgage loans, telling reporters and editors of The Washington Times that “I’ve had eight houses and I didn’t read all that mess.”

His proposal might open up an avenue of recourse for the first time for homeowners in over their heads who would like to refinance and stay in their homes.

“I just made a proposal this morning to the White House for those loans that are under water. We will insure 80 to 85 percent of the loan — give ourselves some leeway even if it falls a little more,” he said.

Mr. Jackson said he thinks the steep drop in home prices may be close to bottoming out, but his proposal shows that the administration, like many in the private sector, is preparing for the worst.

The proposal has not been approved by the White House but might be “soon,” said HUD spokeswoman DJ Nordquist. “We’d like to get those loans right-sized up” and “use the FHA where we can” to alleviate the foreclosure crisis, she said.

Mr. Jackson said he can sympathize with people who are caught off-guard by sudden surges in their monthly mortgage payment because they didn’t read the fine print in their contracts.

Many people with homes in foreclosure say they didn’t understand what they were getting into when they took out their loans, but the administration until recently has taken a hard line, insisting that people must take responsibility for their financial decisions.

“I’m an attorney, and I’ve had eight houses and I didn’t read all that mess. If I didn’t read it — and I doubt anyone around this table read it — then we can’t hold people responsible for not reading every line when they were closing their loan,” Mr. Jackson said.

Mr. Jackson said he was particularly concerned about people who got loans from mortgage brokers who were not regulated by the federal government and therefore did not have to comply with strict disclosure and anti-predatory lending rules. Many of those brokers told people they were getting safe fixed-rate loans when they actually got risky adjustable-rate mortgages, he said.

“Let me tell you about blacks and Hispanics in the market,” he said. “We operate by friend to friend, mouth to mouth,” and many did not realize their brokers could not be trusted, he said.

Mr. Jackson had little sympathy, however, for people with high incomes and education who knowingly took out risky loans with backloaded payments in a gamble to make quick money flipping houses during the housing boom. That is the reason the Bush administration is not offering such people assistance in avoiding foreclosure, he said.

“We’re talking about the yuppies. We’re not talking about a teacher, a fireman or policeman,” he said. “We had some people at HUD — very, very educated — they did that and they’re suffering at this point. We’re not going to help those people.”

The department estimates that about half of the loans in default and foreclosure nationwide were taken out by people of means who are not eligible for assistance under the department’s foreclosure prevention and insurance programs, which are aimed at lower-income homeowners. That includes about 25 percent of foreclosed homes that were owned by investors.

Mr. Jackson said his own experience with not reading the fine print on mortgage contracts is the reason the department proposed much stronger disclosures for borrowers earlier this month. The new rules would require mortgage brokers to inform borrowers early on when they’re shopping for loans whether their loans will reset at higher rates in an easy-to-read format.

A part of Mr. Jackson’s tenure as HUD secretary has been the failure of Housing Opportunities for People Everywhere, or HOPE VI program, which he named.

The program was conceived in 1990 and funded in 1991 to tear down pockets of poverty in public housing projects and transform them into neighborhoods mixed with low, middle and higher income residents.

“What most people do not understand is we have given out almost 270 grants to Hope VI, and we’ve only completed 75 of them in the lifetime of the program,” Mr. Jackson said.

“We’re still looking at $1.4 billion outstanding in the Hope VI program today that has been unspent for almost five to eight years. I have asked Congress on a number of occasions to let us recapture that money and give it to cities that have performed well. That is what we should be doing.”

Corruption and mismanagement have dogged the program.

“It has been very disheartening to me to be a member of the 28-person commission that started Hope VI and see how it has not worked,” Mr. Jackson said.

c Brian DeBose contributed to this report.

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