Floundering U.S. housing rescue needs changes-HUD

WASHINGTON Feb 3 (Reuters) - A U.S. housing official urged Congress on Tuesday to overhaul a $300-billion federal mortgage guarantee fund that was meant to help struggling homeowners avoid foreclosure, but has failed to catch on.

The Hope for Homeowners program was one of the first federal responses to the housing market crisis. Approved by Congress in July, it was launched in October with estimates that it would assist as many as 400,000 mortgage borrowers.

But so far only 451 applications to participate have been received, 25 loans have been closed, and the Federal Housing Administration (FHA) has insured no loans, said an official of the U.S. Department of Housing and Urban Development (HUD).

Delaware Republican Rep. Mike Castle, at a hearing of the House Financial Services Committee, called Hope for Homeowners "one of the most failed programs we've had in a long time."

He said congressional budget analysts have lowered their estimates for how many borrowers might be assisted by the program to 25,000 borrowers from the early 400,000 estimate.

"I'm concerned that we're wasting money on this ... This clearly is not doing what we had hoped it would do," Castle said.

The program set up a $300 billion mortgage insurance fund under the FHA. It was meant to help distressed homeowners switch out of burdensome, exotic mortgages into more affordable government-backed ones. But it has had little impact.

HUD official Meg Burns told the House committee hearing, "Changes are needed as quickly as possible."

Committee Chairman Barney Frank, the main architect of the program, conceded at the hearing that it needs work.

"We didn't do it well. I acknowledge that ... We tightened it up to the point where it does not function very well," said the Massachusetts Democrat, whose panel is targeting a wide range of financial oversight reforms for 2009.

Frank is proposing legislation that would lower program participation standards, cut consumer costs and bring Hope for Homeowners into closer conformity with existing federal housing practices to reduce lenders' implementation costs.

Burns is executive director of Hope for Homeowners' board and manages the program day-to-day. She is also director of HUD's Office of Single Family Program Development.

She said the Federal Housing Administration has received more than 66,000 phone inquiries about Hope for Homeowners, but "overly restrictive eligibility standards and extremely high costs to consumers" have discouraged participation.

Burns said many of the limits on the program were meant to make it fair and prevent abuse. But she said she supports the thrust of the changes that Frank wants to make and she called for finding further ways to reduce the program's costs.

"Do I think that the program could be revamped and improved and made to work? Absolutely," she said.

Amid a crisis in the capital markets and a deepening recession, Frank's committee is expected to play a major role in the economic policy response being fashioned by congressional Democrats and the Obama administration.

One of Frank's earliest achievements as committee chairman was Hope for Homeowners, which was made into law only after intense congressional debate and many compromises. Its ultimate cost was expected to be far less than $300 billion, assuming that most participants would repay their home loans. (Reporting by Kevin Drawbaugh; Editing by Tim Dobbyn)