About Government Refinance and Home Purchase Programs

The Democrats succeeded in getting some items in the new big bailout bill designed to help struggling homeowners. Here is a paragraph from the summary page of the proposed bill:

II. Homeownership Preservation

EESA requires the Treasury to modify troubled loans – many the result of predatory lending practices – wherever possible to help American families keep their homes. It also directs other federal agencies to modify loans that they own or control. Finally, it improves the HOPE for Homeowners program by expanding eligibility and increasing the tools available to the Department of Housing and Urban Development to help more families keep their homes.

That sounds like good news. The government is about to buy a lot of mortgages so they ought to have some say about who gets to participate in the new HOPE loans right? Here are some more details from the section by section summary page. These are the section headers of most interest here:

Section 109. Foreclosure Mitigation Efforts.
For mortgages and mortgage-backed securities acquired through TARP, the Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs. Allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures. Requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to the taxpayer.

Section 110. Assistance to Homeowners.
Requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures. Requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer.

Section 124. Hope for Homeowners Amendments.
Strengthens the Hope for Homeowners program to increase eligibility and improve the tools available to prevent foreclosures.

Finally, here is a link to the actual 110 page bill. And here are some relevant quotes from the document that could become law as soon as this Wednesday.

SEC. 109. FORECLOSURE MITIGATION EFFORTS.
2 (a) RESIDENTIAL MORTGAGE LOAN SERVICING
3 STANDARDS.—To the extent that the Secretary acquires
4 mortgages, mortgage backed securities, and other assets
5 secured by residential real estate, including multifamily
6 housing, the Secretary shall implement a plan that seeks
7 to maximize assistance for homeowners and use the au8
thority of the Secretary to encourage the servicers of the
9 underlying mortgages, considering net present value to the
10 taxpayer, to take advantage of the HOPE for Home11
owners Program under section 257 of the National Hous12
ing Act or other available programs to minimize fore13
closures.

SEC. 110. ASSISTANCE TO HOMEOWNERS.
(1) IN GENERAL.—To the extent that the Fed2
eral property manager holds, owns, or controls mort3
gages, mortgage backed securities, and other assets
4 secured by residential real estate, including multi5
family housing, the Federal property manager shall
6 implement a plan that seeks to maximize assistance
7 for homeowners and use its authority to encourage
8 the servicers of the underlying mortgages, and con9
sidering net present value to the taxpayer, to take
10 advantage of the HOPE for Homeowners Program
11 under section 257 of the National Housing Act or
12 other available programs to minimize foreclosures.

The last one is a little hard understand but the upshot is that the new act is loosening the standards for the Hope For Homeowners loans (aka HOPE loans, aka FHA short refinances).

See these changes in the context of the existing law here.

It looks like an agreement has been reached on the massive financial bailout and there are reportedly stipulations in the bill that are designed to help struggling homeowners. Details are not yet released but we get this from the recent AP article on the topic:

To help struggling homeowners, the plan would require the government to try renegotiating the bad mortgages it acquires with the aim of lowering borrowers’ monthly payments so they can keep their homes.

But Democrats surrendered other cherished goals: letting judges rewrite bankrupt homeowners’ mortgages and steering any profits gained toward an affordable housing fund.

See this this Op-Ed over at the New York Times. The writer has what seems to be a pretty good idea. He says the government could help out most by reducing interest rates and making it easier for people to buy homes or refinance mortgages. That would in turn slow the massive slide in housing prices. Here is a quote:

The government is in a great position to cut rates by about a point: Through Fannie Mae, Freddie Mac and the Federal Housing Administration, it now controls nearly 90 percent of all mortgage originations. These lower rates would apply to most home buyers who take out a loan under $729,750 for a house that they will live in.

Along with lower rates, the government should provide temporary down-payment assistance for buyers. The government could, for example, match the amount of money that buyers use for a down payment, up to $15,000. Because the government now controls the bulk of all mortgage financing, this money could be provided directly at closing. Homeowners who refinance their current mortgages could also receive assistance, allowing them to avoid foreclosure.

Programs like these would draw buyers into the housing market and reduce the backlog of unsold and vacant homes. Investors and speculators would be ineligible and would face the full cost of their mistakes.

By stabilizing house prices, these programs would benefit the bulk of Americans, who own a home but did not get involved in the subprime mortgage market. Price stability would more directly achieve the goals of the Wall Street bailout: increase the value of mortgage-backed securities (by increasing the value of the underlying houses) while injecting government capital into the financial system.

There was a good article over at Inman.com the other day that discussed the direct effects the planned massive Wall Street and financial bailout might have on Main Street. Here are some good quotes from the article:

Once taxpayers are in charge of these assets, will troubled borrowers be more likely to get loan modifications or workouts to keep them in their homes? If the government becomes the owner of hundreds of thousands of foreclosed homes, will it sell them quickly at fire-sale prices to investors, or more gradually over time to earn a better return?

While there is general agreement that the government must take action to keep the financial system functioning, the question then becomes: What happens next?

“You save the banking system, now what are you going to do with all this distressed property?” said Dennis Hedlund, president and founder of the mortgage market forecasting firm iEmergent.

As detailed by Paulson, the plan envisions that the mortgage-related assets Treasury buys would be managed by private managers “to meet program objectives.”

If the government creates aggressive objectives to keep people in their homes — by forgiving some of the principal on their loans, for instance — “that could very quickly solve a lot of problems” in housing markets where prices continue to fall, Hedlund said. But that approach would mean larger losses up front, and perhaps a bigger bill for taxpayers in the long run.

“If the government does more modest workouts and hopes home values sort of correct themselves, there’s a danger home prices would continue to fall, and this could really stretch out,” Hedlund said. “It’s really a question of how fast do you want to get it over with? The faster you want to get it over with, the more the government will foot the bill, so there will be political pressure not to do that.”

We also get this:

In an e-mail to clients, K&L Gates attorney Larry Platt noted that Treasury has not spelled out any requirement to seek to preserve home ownership or otherwise deal with foreclosures and loss mitigation, “which is one of the biggest criticisms leveled at the plan by the Democrats. That doesn’t mean that Treasury will not implement an ambitious loan modification program; it just means that (as proposed Saturday) Treasury does not have to do so.”

…

Democrats will also push for looser criteria for the Federal Housing Administration’s HOPE for Homeowners loan guarantee program, which was authorized at $300 billion in HR 3221.

While we are waiting to learn more details from the government and from the banks about HOPE loans (aka FHA short refis), it is worth pointing out that one type of loan can currently be refinanced even when the homeowner is upside down, or in other words, even when the homeowner owes more on the home than the current value. This applies if your current loan is an FHA loan.

The program is called FHA Streamlining and here are the requirements for upside down homeowners or any other current FHA loan holder:

– You must have remained on time with your mortgage payments
– The new loan must be at a lower rate than the old loan
– You cannot take any cash out

See here at the HUD site for more info on FHA Streamlines. The beauty of an FHA to FHA Streamline loan is that there is no credit score requirement and no requirement for an appraisal. That is what makes refinancing possible even when home values in any given area have dropped dramatically.

If you owe more than your home is worth and you have an FHA loan currently contact us today and we’ll see about improving your loan terms.

No one knows for sure what this means but reports this morning are that the Bush administration agreed to the demands of the Democrats that the massive $700 billion bailout will include provisions to help homeowners prevent foreclosure (somehow…). Here is an excerpt from the AP article:

WASHINGTON – A key Democrat negotiating a $700 billion financial bailout says the Bush administration has agreed to include mortgage aid and strong congressional oversight in the plan.

Rep. Barney Frank, the Financial Services Committee chairman, says a great deal of progress has been made in talks between lawmakers and President Bush’s team on the rescue.

A government official with knowledge of the talks also said the administration has agreed to create a plan to help prevent foreclosures on mortgages it acquires as part of the bailout.

The federal government saw the writing on this week and decided that if it does not step in to help the financial sector in the US the entire economy could come to a grinding halt and plunge the US into a depression. The solution proposed centers around the government buying up something like $700 billion worth of undesirable bundled securities made up of all kinds of mortgages that may or may not ever get paid. The basic idea is that if the banks can be relieved of this burden the whole financial system will start working again. That means loans will become easier to get again which will lead to more home buyers again which will prop up housing prices again, etc. Most experts agree that dramatic action like this is needed. The idea seems to be that the dangers associated with the US falling into an economic depression more than offset the risks of this sort of bailout.

Both the Republicans and Democrats are on board with the general idea, but the Democrats are working hard to be sure the richer don’t get richer as a result of this action. Here are a few interesting quotes from a recent Bloomberg article:

U.S. Democratic lawmakers said they would act quickly on a $700 billion rescue plan for financial companies, while demanding that the legislation limit compensation for executives of companies that will benefit. …

“I know of nobody who is arguing over the amount of money or even about that the secretary ought to have the authority to purchase these toxic instruments, these bad debts,” said Senator Christopher Dodd, the Democratic chairman of the Banking Committee.

Still, Democrats said they would seek changes, including limiting executive compensation and offering new help to homeowners struggling to avoid foreclosure. …

“This is not a position where I like to see the taxpayer, but it is far better than the alternative,” Paulson said on NBC’s “Meet the Press.” …

Frank said it would be a “grave mistake” not to include a executive pay provision, while Paulson called such a measure “punitive.” …

As has been the norm with these recent volatile events, there are numerous details that have yet to emerge with all of this. It is possible that the new situation will help more upside down homeowners refinance into FHA short refi loans than before. Whatever the case, things are looking brighter for homeowners in trouble than they looked just a week ago. We’ll keep you posted on new developments.

There was an excellent article over at HousingWire.com on the recent congressional hearing with lenders about the Hope For Homeowners program that is set to launch in less than two weeks. While lenders are not jumping for joy over the prospect of writing off millions of dollars of debts indications are that they will use the program when it is the best remaining option. But they are still waiting on the FHA to release more details and guidelines before they can set their policies. Here is a quote from HUD commissioner Brian Montgomery in the article:

Part of servicers’ hesitance to provide details may be due to a lack of details surrounding the program specifics; it’s tough to say who will qualify when you don’t know what the standards will be. HUD commissioner Brian Montgomery, however, assured Congress that everything would be in place in time.

“First and foremost, we want to assure you that we are firmly committed to having the program up and running by October 1, 2008, and believe this goal is achievable,” Montgomery said to open his testimony on Wednesday.

The good news is that part of the delay seems to be that HUD is trying to figure out a way to get 2nd mortgages in on the act so they will not block the program entirely. Right now most 2nd mortgages stand to lose everything with a HOPE loan so they have no incentive to allow for the refinance.

HUD’s Montgomery also alluded to perhaps the program’s largest sticking point: second liens. “One of the greatest challenges to successful loan modifications is obtaining the consent of all existing lien holders, including the holders of junior mortgages,” he said. He suggested HUD was close to proposing rules under the HFH program that would have second lien holders share in the government’s interest in the property.

There are clearly some hurdles to overcome there but with any luck the folks at HUD will concoct a win-win program.

Not surprisingly, Montgomery also noted that the HOPE loans will have a higher interest rates than traditional FHA loans.

A very interesting article over at CNNmoney.com suggested that many lenders are not enthused about the new HOPE loan/FHA short refi program at all. This is in line with our predictions that HOPE loans will be seen as the very last option by banks when all other options look worse. Here are some quotes:

As part of the massive housing rescue bill passed by Congress in July, troubled borrowers will be able to refinance their home loans with the backing of the Federal Housing Authority (FHA) starting on October 1.

But at a congressional hearing today in Washington, lenders didn’t seem terribly enthusiastic about the program, dubbed Hope for Homeowners.

…

One lender’s representative, Marguerite Sheehan, Senior Vice President for JPMorganChase (JPM, Fortune 500) Home Lending, testified about the drawbacks of Hope for Homeowners.

“Under the Program, [investors in the loans] will take a loss when the principal balance is written down,” she testified, adding that they won’t have a chance to make up that loss if home prices recover. Sheehan added that Chase can make borrowers’ monthly payments affordable simply by reducing their interest rates, rather than loan principle.

She added that JPMorganChase will use the program when it is deemed to be the best option for investors and borrowers, but that investors would prefer to use alternative loan workouts that give banks and investors the chance to share in any future home price appreciation. That’s similar to the program recently announced by the FDIC for IndyMac Bank.

…

When asked whether the program would be considered a last resort by lenders, all the members of the panel, including Gross, agreed that it would be.

The good news might be that more and more banks will be looking to modify existing loans in efforts to avoid foreclosure in the next year. The value to a loan modification is that a bank still gets to collect the whole loan amount eventually rather than write down the loan by tens or hundreds of thousands of dollars.

So in the end it looks like the FHA short refi is just as we predicted — a last ditch escape hatch where banks lose less money than they would if they foreclosed and consumers get to stay at home. It is certainly better to have such an eject seat available than not, even if it won’t work for everyone.

As the fallout from the US mortgage crunch gets worse and worse (see the news today with Wall Street behemoth Lehman Brothers going under and Merrill-Lynch agreeing to fold into Bank of America) there is no question that the banking disaster is far from over. The Federal government has reached its limit when it comes to bailing banks out so expect more and more banks to fail.

What effect this will have on the mortgage industry is still unclear but the banking world will never be the same after 2008. More and more people are wisely looking into FHA-backed mortgages and that trend will likely continue until things turn around enough for irrational exuberance to take hold again. If you find yourself in a adjustable rate mortgage (ARM) and are feeling a bit nervous about it contact us about getting refinanced into a fixed rate loan. Rates are back down here is September of ’08 so the timing is looking very good right now.

While the overall impact of the Fed stepping in to take over Fannie Mae and Freddie Mac is still to be determined, the short term impact has been that interest rates have dropped pretty significantly this week. FHA loans that used to be in the high 6’s are now in the low 6’s. People with great credit and equity can even get loan in the 5’s this week.

For most of the summer rates were hovering between 6.5% and 7% so this drop in rates is a welcome change and it is spurred by the Fed action this weekend

The results from the second quarter came in on Friday from the Mortgage Bankers Association and they were sobering. Nearly 1 in 10 mortgages were 30 days or more late. It was news like this that prompted the federal government to take of Fannie Mae and Freddie Mac over the weekend. As drastic as that measure might seem, the Fed apparently saw the writing on the wall. This title wave of defaulting mortgages is far too big for Fannie and Freddie to handle on their own. Here is a link to a recent WSJ article on the MBA report and a few quotes:

The rate of U.S. home mortgages overdue or in foreclosure rose again in the second quarter as housing markets weakened, particularly in California and Florida, and more borrowers defaulted on so-called prime loans.

Among mortgages on one- to four-family homes, 9.16% were at least a month overdue or in the foreclosure process in the second quarter, according to the latest survey by the Mortgage Bankers Association, a trade group. That is up from 6.52% a year earlier and is the highest level since the MBA began such surveys 39 years ago.

…

For prime loans, 5.35% of loans were past due or in foreclosure in the latest quarter. For subprime, the rate was about 30%.

In the latest quarter, 2.75% of all loans were in the foreclosure process, up from 1.40% a year earlier.

California and Florida account for about one in five mortgage loans outstanding, but 39% of loans that went into the foreclosure process in the quarter were in those two states.

…

Among loans insured by the Federal Housing Administration, 14.87% were overdue or in foreclosure, up from 14.73% a year earlier. The portion of FHA loans going bad is likely to increase in the quarters ahead because of a surge in new loans insured by the federal agency.

The share of new mortgages insured by the FHA leaped to 23% in July from a low of 1.8% in 2006, according to Inside Mortgage Finance, a trade publication. Guy Cecala, publisher of Inside Mortgage Finance, said the FHA’s share might reach 30% by year end.