About Government Refinance and Home Purchase Programs

Last Fall President Bush unveiled his FHASecure plan and hailed it as a wonderful way to help homeowners struggling with adjustable rate mortgages (ARMs). The idea was that while FHA normally rejects borrowers who had more than one late payment on their mortgage in the last 12 months, with FHA Secure a loophole was added that said “you can be late on your mortgage more than once if the late payments happened as a result of your ARM resetting upward”. Sounds ok right? The problem is the plan hasn’t worked at all. There were all kinds of problems with it from the beginning and recent data published in the NY Times says that only about 2000 homeowners have been able to take advantage of it while millions of others have lost their homes or are on the verge of losing them.

The problems were numerous from the start. First, very few banks were participating at all because they were having trouble finding anyone to sell the loans to on Wall Street. Second, the plan allowed for late mortgage payments but not other credit problems and most people tend to go late on all their other bills before they go late on the mortgage. Third, it didn’t help people before they went late on their mortgage so the prudent borrowers looking to prevent trouble were not helped at all by this program.

In short it was a disaster.

How long until we get a new President again?

President Bush doesn’t have to worry about his popularity any more so opposing the Democrat-led plan in congress to help homeowners avoid foreclosure is no problem for him no matter how many Americans it alienates. Not so for House republicans who would like to be re-elected in 2008. More of them are getting on board with the bill going through congress sponsored by Barney Frank. Here are some excerpts from a recent AP article on the subject:

The Democrats’ housing rescue plan is picking up converts among Republicans who are shrugging off White House objections after getting an earful from voters struggling to stave off foreclosure.

The GOP support is coming from regions hardest-hit by the housing crisis, a sign that battle lines over how to address the mortgage meltdown are more geographic than partisan.

Rep. Steven C. LaTourette, an Ohio Republican, says housing officials in his area have warned him that “a ton” of his constituents have adjustable-rate mortgages that will reset to unaffordable rates this year or next.

Lawmakers who fail to work together on a solution will do so “at their peril,” said LaTourette, who is backing Democrat Barney Frank’s plan.

“This has the ability to keep people in their houses,” said LaTourette, a seventh-term congressman who is facing a competitive re-election race.

As for President Bush’s opposition, he says Bush and his team are “just not thinking clearly on this.”

SFGate published an excellent article spelling out the various legislation in congress right now. It turns out that the so-called “Foreclosure Prevention” bill is a disaster brought to us by the lobbyists and it looks like it is designed to make the rich richer. We get these quotes on it:

Foreclosure Prevention Act: This bill, which is fairly far along in the political process, would modernize FHA loans, increasing the agency’s mortgage limit to $550,000.

It provides funds for pre-foreclosure counseling, and $10.9 billion in mortgage revenue bonds for loan refinancing. It gives $25 billion in tax breaks to home builders, as well as domestic airlines, automakers and other manufacturers. It also encourages purchase of already-foreclosed properties, with $4 billion in grants for communities to buy foreclosures and a $7,000 tax benefit for people who buy them.

The bill has the rare distinction of uniting consumer advocates and conservative economists in disdain. “Big tax breaks for home builders is the centerpiece, which we think is atrocious,” said Paul Leonard, West Coast director for the Center for Responsible Lending. “It’s a triumph of lobbying over need,” said John from the Heritage Foundation. Consumer advocates support the FHA reform and counseling money, though.

What a mess.

The bill that consumer advocates really want is being called the Hope For Homeowners bill. Here is a description:

Lenders would voluntarily submit shoddy mortgages for refinancing, taking a drastic haircut on the amount owed in exchange for a lump-sum payoff. Mortgages would be issued for 90 percent of homes’ current values – which are likely much less than the original amount of the mortgage. The FHA would take part of the new loan as a fee, and then would share in future appreciation. Democrats project the government might lose 1 to 2 percent of the $300 billion if refinanced borrowers later default.

Consumer advocates strongly support the bill, but it draws fierce criticism from the White House and Republicans.

If you are in trouble with your mortgage it looks like the Democrats are your allies right now…

Check out this interesting set of numbers from a recent article over at the San Francisco Chronicle:

A congressional proposal to refinance struggling homeowners into 30-year fixed mortgages works like this:

The FHA would refinance homes with mortgages for 90 percent of their current value, leaving 10 percent equity in each home. That equity would be split between the FHA, as its cushion in case of defaults or further market collapses, and the homeowner, to give some “skin in the game” as incentive to stay in the house.

Suppose you bought a house for $600,000 two years ago, putting no money down and it has lost about 16 percent of its value.

— $500,000 – home’s current value

— $450,000 (90 percent of current value) – the new FHA mortgage. Of that, $425,000 (85 percent of current value) goes to the lender and $25,000 goes to the FHA as a fee.

— The lender is now swallowing a total loss of $175,000, or 29 percent of the original $600,000 mortgage.

— $50,000 (remaining equity in the home) – split between FHA and borrower. When the home is sold, the FHA would get a share of any appreciation.

The real question is whether banks will actually go for this kind of offer. What must a borrower do to qualify? Answer are likely pending on these questions so stay tuned.

Congress is slowly trying to help stem foreclosures. See this quote from a recent article at housingwire.com:

Earlier Wednesday, the House panel also passed H.R. 5579, the Emergency Loan Modification Act, without a vote. The proposed bill would seek to shield mortgage servicers from legal liability arising out of bulk loan modifications that may violate existing Pooling and Servicing Agreements, and is strongly opposed by many industry groups.

Congressmen Michael N. Castle (R-DE) and Paul E. Kanjorski (D-PA) originally introduced the bill in mid-March.

“I think it’s in the best interests of at-risk homeowners and investors to work out payment terms that give a homeowner financial stability and the investor some return for their investment,” said Castle. “Without this legislation, I am concerned that lawsuits could bring modifications to a halt.”

The AP is reporting that President Bush would veto the House foreclosure prevention bill if presented with it today. Reuters has a the Bush team saying “we can work with this bill”. Perhaps they are both right. It looks like the bill will need to be cut back a little but a compromise is likely.

There was another pretty good AP article on the foreclosure prevention bill in the AP recently. Here are some excerpts:

Homeowners staggering under mounting mortgage debt and facing foreclosure could get cheaper, government-backed loans under Democrats’ housing rescue plan.

But first, lenders would have to agree to wipe out part of their debt. And the borrowers would have to show they could afford the new mortgage. They also would have to agree to share any future profits on the home with the government.

…

It’s unclear how many would qualify, however, even under far looser FHA standards. Also an open question: whether mortgage servicers would agree to participate in the voluntary program.

…

The bill is H.R. 5830.

There was a brief summary from the AP of the changes to the FHA qualification requirements in the new bill going through the House right now. Here is an excerpt:

Legislation by Rep. Barney Frank, D-Mass., the House Financial Services Committee chairman, would relax the Federal Housing Administration’s underwriting standards to allow the hardest-pressed homeowners to qualify for government-backed loans.

That includes people who owe more than their homes are worth and are badly behind on their mortgage payments, have poor credit and devote a hefty share of their monthly income to servicing their mortgages, credit card bills, car payment and other debts.

Here’s how eligibility would change.

To get an FHA-backed loan now:

_Total monthly debt obligations (including mortgage, car, student loan and credit card payments) cannot amount to more than 43 percent of monthly gross — pretax — income.

_ Monthly mortgage payment (including property taxes and insurance) should not be more than 31 percent of income.

_Poor credit score or past delinquencies can be disqualifying factors. (New rules in effect until the end of the year allow people who fell behind after their mortgages reset or missed two or three payments to be eligible.)

To get an FHA-backed loan under Frank’s measure:

_ Monthly payment on the existing mortgage has to be at least 35 percent of income as of March 1, 2008.

_ With new loan, total monthly debt obligations could rise to as high as 50 percent (or 55 percent at the FHA’s discretion) of monthly income so long as the borrower could show that he made six months of payments on the previous mortgage on time.

_ Poor credit score or past delinquencies cannot by themselves disqualify a homeowner.

We recently got this quote from a Forbes article:

As outlined by FHA Commissioner Brian Montgomery this morning, the White House proposal encourages lenders to reduce the principal on loans, in exchange for FHA insurance for the renegotiated loan. Sound familiar? It should to those following Washington’s fight over how best to help troubled homeowners.

Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee has the same provision in his bill, as does Sen. Chris Dodd, D-Conn., who proposed the Senate version.

The key provision in the various foreclosure prevention plan is that in cases where homeowners are upside down and likely to foreclose, banks could allow them to write off some of the debt and refinance the homeowner into a new, lower balance loan. The proposal in congress has the new loan at 85% of the current value of the home.

So if a homeowner owed $125,000 on their house and the value of the house had decreased to $100,000, banks would have to forgive $40,000 in debt in order to refinance the homeowner into a government back FHA loan. What would a bank want do such a thing? Because if the homeowner forecloses the bank would lose a lot more than $40,000. By getting the $85,000 government-backed loan in place the risk of foreclosure would be borne mostly by the FHA. It would be the lesser of two evils for the bank, good for the consumer (even though mortgage insurance premiums would be in place), and good for the US economy in general.

We’ll see how it all plays out over the next few months…

An excellent recent article over at CNNmoney.com briefly overviewed the important parts of the new foreclosure prevention bill the congress has been cooking up this week. Here are some excerpts (italics are mine to emphasize key parts):

Congress isn’t done debating how best to stem the foreclosure crisis, but one near-certainty has emerged: Lawmakers will pull together a housing bill that expands Washington’s role in helping troubled borrowers.

Key legislators, Bush administration officials, banking regulators and the presidential candidates have lined up behind the idea of letting the Federal Housing Administration back new loans for homeowners at risk of foreclosure.

Several plans have been proposed. All of them would let the FHA insure mortgages for troubled borrowers whose lenders voluntarily write down loans to an affordable level. Once refinanced, the loans could be sold to investors, which in turn could grease the wheels of the mortgage market as a whole.
….

Government risk will be a key area for compromise. To reach a deal, Seiberg said, negotiators must accomplish two things. First, make sure lenders give up enough principal so the government isn’t subsidizing them. And second, make sure borrowers pay enough – in premiums to the FHA and in equity to the government when they sell the house – to give the program the best chance of paying for itself.

Stay tuned folks. This debate is huge for those of you who can’t yet get even an FHA loan because you are upside down.

An idea that has been gaining popularity in Washington with both Democrats and Republicans is a new bill that would require lenders to allow troubled homeowners to refinance even if they are upside down (owe more than the home is worth) now. Some of the plans have banks allowing homeowners to refinance 85% of the current value of a home and forgiving the original full debt. There was an interesting article at MarketWatch recently on the developing plan. Here are some excerpts:

WASHINGTON (MarketWatch) — While the White House wants to avoid moves it sees as bailing out irresponsible mortgage borrowers, observers say it’s likely that lawmakers looking to be reelected this year will expand the reach of the Federal Housing Administration to keep more borrowers in their homes.

The House and Senate are trying to figure out the right way to widen the reach of the Depression-era agency, with Democrats favoring a large new financial responsibility, a move that concerns conservatives. But there are areas where consensus is developing, such as helping troubled borrowers to stay in their homes by encouraging lenders to write down loan values — a move that the Bush administration advocated last week through its targeted FHASecure program.

“We do think it’s a good development that the White House is agreeing to work with consumers with blemished credit,” said David Berenbaum, executive vice president with the National Community Reinvestment Coalition, a fair-lending advocate.

….

“Legislatively it is our hope that a major commitment will be made to keep America’s working families in their homes,” Berenbaum said.

….

On Wednesday the Senate Banking Committee heard from experts about foreclosure prevention. A plan from Chris Dodd, committee chairman, would create a fund at FHA to insure new, affordable mortgages for distressed homeowners.

“Under my proposal, no one — I repeat — no one, gets what could be described as a bailout,” Dodd said at the Wednesday hearing. “Lenders and investors will have to take a serious haircut to participate in the program. But, in return, they will receive more than what they would recover through foreclosure.”

….

Details could also trip up passage of major FHA legislation. A key to most FHA plans is how great a write-down lenders would have to accept, said Allen Fishbein, director of credit and housing policy with the Consumer Federation of America.

“The situation is very much in flux,” Fishbein said. “Foreclosures are still continuing unabated and likely to increase in coming months, so you see support growing for some approach to use the FHA program to help borrowers avoid foreclosure.”

The Washington Post has an excellent article recently on the popular foreclosure prevention plan congressman Barney Frank has been floating recently. Here are some relevant parts:

The administration and Federal Reserve Chairman Ben S. Bernanke have urged banks to write down loans voluntarily, but reductions in principal remain rare. So, in late February, Frank suggested a far more aggressive role for the FHA, the government’s mortgage insurance provider.

Under his plan, the FHA would be authorized to insure about $300 billion in new loans, nearly doubling its current portfolio. The new mortgage insurance would be offered on refinanced loans in which lenders have agreed to accept 85 percent of a home’s current appraised value as payment in full. That could mean a substantial loss to the lender but probably a smaller loss than if the devalued house were sold at a foreclosure auction. It also would keep the borrower in the house with more affordable monthly payments and an equity stake in the property.

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