Lawmakers send letter to banking regulators on H4H slow start.(Briefing Book)(HOPE for Homeowners )

Sen. Chris Dodd (D-Connecticut) and Rep. Barney Frank (D-Massachusetts) sent a joint letter to the heads of the bank regulatory agencies asking them to investigate if the way banks were valuing second mortgages may be holding up foreclosure-rescue efforts. The letter, dated July 10, was sent to banking regulators asking them to address whether inflated valuations of second mortgages may be making it "virtually impossible" for the HOPE for Homeowners (H4H) program to work.

The letter states, "In recent discussions with servicers, investors in mortgage-backed securities [MBS] and administration officials, it has become clear that one of the most significant impediments to the success of H4H is the unwillingness of subordinate lien holders to extinguish their liens as required for participation in this program, even in return for offers of reasonable compensation. This is true despite the fact that these subordinate liens may have minimal economic value."

To date, Congress has passed two pieces of legislation trying to get the H4H program off the ground. The first was the Housing and Economic Recovery Act (HERA), which established the program in the summer of 2008. Then Congress passed a legislative fix for the program in the Helping Families Save Their Homes Act of 2009, which was designed to make it more workable. Yet originations under the program have remained few and far between. The two banking committee chairman seem determined now to turn up the heat on banks to start doing more H4H loans.

The letter pointedly states, "Many subordinate liens stand behind these mortgages. Carrying these loans at potentially inflated values may contribute to resistance on the part of servicers to negotiate the disposition of these liens, and thus may stand in the way of increasing participation in the H4H program. Inadequate reserving would also overstate the capital position of these institutions at a time when an accurate picture of capital adequacy of the banking system is crucial."

Dodd and Frank urged the regulators to have their staff "look into this issue as expeditiously as possible" and report back their findings directly to the banking committees as soon as possible.

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