About Government Refinance and Home Purchase Programs

There is a lot of scuttlebutt in the news lately about plans being floated around Washington to shore up the housing market. We get this from a CNNmoney.com article:

The government is expected to announce soon that it will devote up to $50 billion to directly address the source of the financial crisis: bad mortgages and millions of homeowners at risk of foreclosure.

White House spokesman Tony Fratto said on Thursday that “no decisions” have been made on “a number of housing proposals” that the administration has been reviewing “for some time.”

The ideas floating around also include looking at completely nationalizing Fannie and Freddie to drive mortgage interest rates down into the mid 4% range from the mid 6% range they are at right now. That would be a major boost to housing to be sure.

There was an informative article published today by the AP on the ongoing mortgage crisis. The upshot of it was that there are all sorts of factors in play that will likely increase the number of foreclosures and thus decrease home values all over the US. Here is the article.

The basic factors that will likely to create a downward spiral in housing for another year or so include the following:

– People who are “upside down” (owe more than the home is currently worth) can’t refinance with any traditional loans so they might just walk away
– As the economy falters more jobs will be lost and job losses are the primary cause of foreclosures
– A large number of homes purchased at the height of the housing bubble were by investors and investors are much more likely to walk away from an investment property than primary residents are

The upshot is that if you are in an adjustable rate mortgage (ARM), still have equity, and have a credit score of 600+ you should look into a refinance now. The problem with waiting is that if housing values continue to drop you may not have equity any more in six months and will be stuck in an ARM without the ability to refinance into a fixed rate loan. Rates on FHA loans this week were hovering between 6.0-6.5%.

If you are already upside down on your mortgage your best bet to work something out with your current lender. If that isn’t working this new H4H program is slowly getting off the ground so that might work as a last ditch effort as well.

There was a pretty good article over at CNNmoney.com explaining why the new H4H program isn’t taking off. Here are some excerpts:

First, the program is voluntary for lenders. And it requires them to take a loss.

It allows certain borrowers at risk of foreclosure to refinance into a 30- year fixed-rate loan insured by the Federal Housing Administration (FHA) if the current lender agrees to write down the existing loan to 90% of the home’s market value today.

In plummeting areas such as California, if a lender holds a $500,000 mortgage and the home’s current appraisal comes in at $400,000, the lender would forgive $140,000 in all.

…

That leads to the second problem: A lack of sheer manpower.

“I am just bombarded,” said Leeann Simpson, a senior loan officer at American Security Financial in Modesto, Calif, which is on the list. But so far, most of the lenders or servicers holding the existing loans aren’t ready for the program or do not understand it yet, she said.

The government did not release the final details of the program until launch day. “We were waiting and waiting for the guidelines, but we didn’t get them until Oct. 1,” said Simpson. “I literally stayed up all night reading, because I had a bunch of appointments lined up.”

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There was an interesting AP article today about a Senate committee meeting on the mortgage mess. The head of the FDIC said there are all kinds of creative plans in the works to try to help Americans prevent foreclosure. Here are some excerpts:

Federal regulators told Congress Thursday they’re working on a plan that could help many distressed homeowners escape foreclosure in a global financial crisis that Federal Reserve Chairman Alan Greenspan warned will get worse before it gets better. …

Neel Kashkari, who is overseeing the government’s $700 billion financial rescue effort, told the Senate Banking Committee that the new plan could include setting standards for changing mortgages to make them more affordable and giving loan guarantees to banks that meet them.

“We are passionate about doing everything we can to avoid preventable foreclosures,” he said.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., told the same Senate panel that the government needs to do more to help tens of thousands of home borrowers avert foreclosure, including setting standards for modifying mortgages into more affordable loans and providing loan guarantees to banks and other mortgage services that meet them.

“Loan guarantees could be used as an incentive for servicers to modify loans,” Bair said. “By doing so, unaffordable loans could be converted into loans that are sustainable over the long term.”

The FDIC is working “closely and creatively” with the Treasury Department on such a plan, she said.

There was an article over at Forbes recently that will be of interest to anyone following the progress of the new Hope For Homeowners (H4H) program. The author says what others are saying — that in order to truly fix the problem our economy faces we will first need to put a tourniquet on the foreclosures all over the country. But he also says that the current H4H program will not work because it is a voluntary program for banks and there is not enough incentive for banks to participate right now.

Unfortunately, he appears to be right. We are more than two weeks into the launch of the H4H program and we have yet to hear of a single bank that is gung ho about the program and actively participating.

There are increasing rumors that some of the Big Bailout money could be used to sweeten the deal for banks in some way to get H4H working better. It may not be as simple as the government taking the full brunt of the losses of the upside down mortgages as John McCain suggested (lifting his idea from Hillary Clinton ironically). But it could be something like the the banks and government sharing those losses. If the federal government does announce a plan along these lines we could see a massive increase in the adoption of H4H, which has thus far not even shown a pulse.

See this excerpt from the article I mentioned:

A more modest proposal than that of Sen. McCain, which may balance costs and benefits more effectively, would follow the example of the successful Mexican “Punto Final” plan of 1999, which resulted in substantial debt write-downs very quickly and the resolution of much financial gridlock in that country.

The government would share losses borne by lenders from mortgage principal write-downs on a proportional basis. For example, taxpayers could absorb 20% of the write-down cost borne by lenders on any mortgage so long as it is agreed through a voluntary renegotiation between lenders and borrowers, and so long as doing so creates a sufficient write-down for borrowers to be able qualify for refinancing under the FHA facility.

This plan would cost much less than the McCain plan (perhaps only about $10 billion) and would not reward the worst kind of recklessness, since it would only result in borrowers receiving help if they were already close to avoiding foreclosure on their own. This proposal, while selective in its effect, could still help many avoid foreclosure.

The group of borrowers whom it would help are those whose mortgages need a little more of a write-down than their lenders would be willing to do without a subsidy. For this “marginal” group, foreclosure creates only a small private benefit to lenders compared with the alternative of agreeing to a viable mortgage write-down. The plan would work by encouraging lenders to write down more of any outstanding mortgage to avoid foreclosure. But it would not rescue people who are so far from being able to avoid foreclosure that even a substantial subsidy for write-downs isn’t enough.

People often ask us what the interest rate on FHA loans is. The answer is pretty simple: It is normally very close to the rates on a conventional loan.

As we have discussed before, an FHA loan is essentially the same as a conventional loan. Banks still loan you the money, the difference is that with FHA loans Uncle Sam is co-signing with you. So while banks might reject your conventional loan application because your credit score is below 680 or because you have less than 90% equity in your home, when you bring Uncle Sam along banks become willing to approve your loan because they know that if you default they can turn to Uncle Sam to get their money back.

So then how are mortgage interest rates determined? The answer is pretty simple. The best mortgage rates tend to be 2-3% greater than the rate on the 10-Year Treasury Note. So while you often hear news about the Fed dropping the “Key Rate” or news about the stock market, it is the 10-Year Treasury Note that is the best indicator on where mortgage interest rates will be — including FHA rates.

This week the the rate on that index has shot upward and unfortunately mortgage interest rates have followed. But with any luck the rates will drop again soon. October 2008 has been a volatile month in the financial markets to say the least.

Here is an excerpt from an interesting article at cnnmoney.com from a few years back explaining this concept of how mortgage rates are determined in more detail:

Basically, when you take out a mortgage, a bank, mortgage company or other mortgage originator is making you a loan at given interest rate. Sometimes the firm that makes the loan holds onto it.

But more often than not, the lender or mortgage originator sells that loan to an institution that packages it with other mortgages into what’s known as a mortgage-backed security and then sells that security to investors. That investor, whether it’s a mutual fund or a large institutional investor, earns a return by collecting the principal and interest payments that you and all the other mortgage borrowers make.

In order to get investors to buy those mortgage-backed securities, they must pay rates of interest that are competitive with alternative interest-paying investments such as Treasury bonds.

You might figure that, since a 30-year mortgage has the same term as a 30-year Treasury bond, mortgage rates might track the rates on long-term Treasury securities. In fact, 30-year mortgages remain outstanding on average about 10 to 12 years, so rates on 30-year mortgages tend to track the yields on 10-year Treasury notes.

Of course, since you and other mortgage borrowers aren’t as good a credit risk as Uncle Sam, rates on mortgages are somewhat higher than those on 10-year Treasuries. In general, 30-year mortgage rates are about two percentage points higher, but that spread can vary depending on the supply and demand for Treasuries and mortgage-backed securities as well as a number of other factors.

John McCain announced a radical idea relating to mortgages in the presidential debate last night. Earlier today his camp provided more details. Here is a useful summary from an article over at US News and World Report:

Here’s how it works:

Step One: Struggling homeowner contacts mortgage broker
To initiate the process, struggling borrowers tell their mortgage broker that they would like to refinance their loan through this initiative. The program would be open to a wide swath of distressed borrowers: You do not have to be in foreclosure or even underwater on your mortgage to participate. Participation is limited to primary residences and homeowners who can prove that they were creditworthy borrowers when they got their original loan.

Step Two: Government buys the distressed mortgage
If the troubled borrower qualifies, the government will buy the mortgage.

Step Three: Government provides a new, federally guaranteed mortgage
After acquiring the distressed mortgage, the government will swap it for a more-affordable, fixed-rate home loan backed by the FHA. Holtz-Eakin said the rates for the new mortgages would be “in the low fives at this point.” That’s significantly less than current 30-year fixed rates. Funding would come from existing initiatives such as the recently enacted $700 billion bailout. By stabilizing the housing market, Holtz-Eakin said, the plan might be able to ease the stress in the credit markets enough to reduce the final tab of the $700 billion bailout.

How many people will it help?
Holtz-Eakin said McCain’s plan “could help literally millions of people.”

Will it work?
Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School, says that while the plan could certainly help struggling borrowers, it may end up costing more than estimated. “Three hundred billion does not sound like it’s nearly enough,” she says. That’s partly because there are so few limitations on who can participate in the program. “The way it reads here, tomorrow we should all be lining up [to participate],” Wachter adds.

Meanwhile, Christopher Thornberg of Beacon Economics doesn’t think the plan will be able to halt the painful decline in home prices. “The problem is not people losing those homes; the problem is people trying to buy those homes can’t afford them,” he says. Despite precipitous declines already, home prices have to fall further before they become affordable to most Americans, Thornberg says. McCain’s plan is predicated on the notion that “if we could just stop home prices from falling, everything will be fine,” Thornberg says. “And my comment to that would be: ‘Yes, and if we could just stop gravity, we could all fly.’ “

Here are the specific eligibility requirements for a H4H loan as released by HUD earlier this week:

Borrower Eligibility

Borrowers who are current or delinquent on their mortgage at the time of the refinance are eligible for this Program, if they:

– Have not intentionally defaulted on their mortgage or any other debt (Intentionally defaulted means the borrower had available funds that could pay the mortgage and other debts without hardship. Debts subject to a documented bona fide dispute may be excluded.) AND

– Have made a minimum of six (6) full payments during the life of the existing senior mortgage (full payment is defined as what was acceptable to the lender for meeting the monthly payment obligation under the terms and conditions of the mortgage).

Borrowers must reside in the property securing the loan being refinanced, and may not have an ownership interest in other residential real estate, including second homes and/or rental properties.

Borrowers cannot have been convicted of fraud under state and Federal laws in the last 10 years.

– Similar to its validation tool for social security numbers, FHA will use an automated tool at the time of case number assignment that will check the borrower’s name against several databases for convictions of fraud and an ownership interest in other residential properties. In the event that the lender receives a warning at case number assignment and believes it is in error, it must provide evidence to the appropriate Homeownership Center documenting that the borrower has not been convicted of fraud or does not have an ownership interest in other residential properties. Once the Homeownership Center evaluates the documentation, it will determine whether to lift the warning.

Borrowers must certify that they did not knowingly or willfully provide material false information to obtain the existing mortgages being refinanced under the H4H Program.

As of March 1, 2008, the borrower’s aggregate total monthly mortgage payment debt-to-income ratio (DTI) on all existing mortgages must be greater than 31 percent of the borrower’s gross monthly income. The total monthly mortgage payment is defined as the fully-indexed and fully-amortized Principal, Interest, Taxes and Insurance (PITI) payment (this includes principal and interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens).

FHA recognizes that reconstructing the borrower’s prior total monthly mortgage payment DTI as of March 1, 2008 may be difficult, especially as the H4H Program nears its sunset date. To comply with this eligibility requirement, lenders must obtain:

1. From the borrower, evidence that the prior mortgage DTI was more than 31 percent on March 1, 2008, such as pay stubs for March 2008, or a signed and dated copy of the individual 2008 Federal tax return, when available, to determine gross monthly income for that month (earnings divided by 12), or W-2s, financial records, or verification of employment from the borrower’s employer.

Lenders may also rely on the borrower’s signed and dated 2007 Federal tax return if the lender has no reason to believe that the borrower’s income in March 2008 was materially different than the income reported on the 2007 Federal tax return.

To determine March 2008 income for self-employed borrowers, obtain a copy of the quarterly tax return that contains income stream information for March 2008 or a signed and dated Profit and Loss Statement and balance sheet that contains income stream information for March 2008 or a signed and dated copy of the individual 2008 Federal tax return, when available, (earnings divided by 12).

2. From the servicer of the mortgage, the borrower’s total monthly mortgage payment due for March 2008, including any amounts due on subordinate liens.

For mortgages without escrow accounts, the lender should obtain tax and insurance information from the borrower. If the borrower does not provide insurance information, then the servicer of the mortgage should estimate the monthly cost of hazard insurance (and flood insurance, if applicable) based on the property’s location and the rates in effect for 2008. If the borrower does not provide real estate tax information, the lender should obtain it from public records.

Mortgage Eligibility

The mortgage being refinanced must have been originated on or before January 1, 2008;

Each holder of an existing senior mortgage being refinanced must:

1. Waive all prepayment penalties and late payment fees (including insufficient funds fees) on the mortgage. Prepayment penalties are defined in the Federal Reserve Board’s Regulation Z (Truth in Lending), 12 CFR 226.32(d)(6);

2. Agree to accept the proceeds of the new H4H mortgage as payment in full, and

3. Release their outstanding mortgage liens.

Each holder of an existing subordinate mortgage must:

1. Waive all prepayment penalties and late payment fees (including insufficient funds fees) on the mortgage. Prepayment penalties are defined in the Federal Reserve Board’s Regulation Z (Truth in Lending), 12 CFR 226.32(d)(6); and

2. Release their outstanding mortgage liens.

Any type of mortgage is eligible for refinancing under the H4H Program, including conventional (prime, Alt-A, subprime) or government-backed (FHA, VA, or Rural Development), fixed-rate or an adjustable rate mortgage; and

The mortgage being refinanced may have a variety of payment characteristics, including interest only, payment option, negative amortization and/or any other exotic features.

Property Eligibility

The property must be the borrower’s primary and only residence in which they have an ownership interest (if there are non-occupant co-borrowers, they will need to quit claim their interest in the property prior to the occupying co-borrowers applying for the H4H Program);

Only 1 unit properties are eligible, including condominium units, cooperative units and manufactured housing permanently affixed to realty.

Here is the press release that was published today at the HUD web site on the official first day of the Hope For Homeowners loan program:

BUSH ADMINISTRATION LAUNCHES “HOPE FOR HOMEOWNERS” PROGRAM TO HELP MORE STRUGGLING FAMILIES KEEP THEIR HOMES
Detailed Program Eligibility Requirements Announced

WASHINGTON – The Bush Administration today unveiled additional mortgage assistance for homeowners at risk of foreclosure. The HOPE for Homeowners program will refinance mortgages for borrowers who are having difficulty making their payments, but can afford a new loan insured by HUD’s Federal Housing Administration (FHA).

“For families struggling to keep up with their mortgage payments, this program will be another resource to refinance into a loan they can afford,” said HUD Secretary Steve Preston. “FHA remains a safe and affordable alternative to the high-priced mortgage loans that threaten homeowners’ ability to retain their homes. We strongly encourage borrowers to work with their lenders to determine if HOPE for Homeowners is the right program for them.”

The HOPE for Homeowners program was authorized by the Economic and Housing Recovery Act of 2008. Since the President signed this vital legislation into law on July 30, 2008, the HOPE for Homeowners Board of Directors has worked diligently to develop and implement the program as directed by Congress. The Board was charged with establishing underwriting standards to ensure borrowers, after any write-down in principal, have a reasonable ability to repay their new FHA-insured mortgage.

The HOPE for Homeowners program begins today and ends September 30, 2011. The program is available only to owner occupants and will offer 30-year fixed rate mortgages – so the borrower’s last payment will be the same as the first payment. In many cases, to avoid what would be an even costlier foreclosure, banks will have to write down the existing mortgage to 90 percent of the new appraised value of the home.

Borrower Eligibility

Borrowers are encouraged to contact their lender to determine eligibility, but may be eligible if, among other factors:

* The home is their primary residence, and they have no ownership interest in any other residential property, such as second homes.

* Their existing mortgage was originated on or before January 1, 2008, and they have made at least six payments.

* They are not able to pay their existing mortgage without help.

* As of March 2008, their total monthly mortgage payments due were more than 31 percent of their gross monthly income.

* They certify they have not been convicted of fraud in the past 10 years, intentionally defaulted on debts, and did not knowingly or willingly provide material false information to obtain their existing mortgage(s).

How the HOPE for Homeowners program works

“HOPE for Homeowners will add to HUD’s existing efforts to make FHA refinancing available to homeowners who need it most,” said FHA Commissioner Brian D. Montgomery. “One year ago, FHA expanded refinancing into its FHASecure program. Since that time, we have helped more than 360,000 families keep their homes by refinancing with FHA, and we will assist a total of 500,000 families by the end of this year.”

The Board expects that the primary way homeowners will participate in the program is by working with their current lender. HOPE for Homeowners will serve as another loss mitigation tool available to distressed borrowers.

HOPE for Homeowners also includes the following provisions:

* The loan amount may not exceed a maximum of $550,440.

* The new mortgage will be no more than 90 percent of the new appraised value including any financed Upfront Mortgage Insurance Premium.

* The Upfront Mortgage Insurance Premium is 3 percent and the Annual Mortgage Insurance Premium is 1.5 percent.

* The holders of existing mortgage liens must waive all prepayment penalties and late payment fees.

* The existing first mortgage must accept the proceeds of the HOPE for Homeowners loan as full settlement of all outstanding indebtedness.

* Existing subordinate lenders must release their outstanding mortgage liens.

* Standard FHA policy regarding closing costs applies, and they may be:
o Financed into the new loan provided the value of the mortgage (including the Upfront Mortgage Insurance Premium) does not exceed 90 percent of the new appraised value of the home.
o Paid from the borrowers’ own assets.
o Paid by the servicing lender or third party (e.g., federal, state, or local program).
o Paid by the originating lender through premium pricing.

* The borrower must agree to share with FHA both the equity created at the beginning of this new mortgage and any future appreciation in the value of the home.

* The borrower cannot take out a second mortgage for the first five years of the loan, except under certain circumstances for emergency repairs.

The lender will disclose to the homeowner the benefits of the program including home retention, a new affordable mortgage based on the current appraised value, and 10 percent equity. The lender will also explain the prohibition against new junior liens against the property unless directly related to property maintenance, and a minimum of 50 percent equity and appreciation sharing with the Federal government.

The costs to the homeowner include the upfront and annual insurance premiums, as well as a share of the equity created by the write-down associated with the HOPE for Homeowners mortgage and any future appreciation in the value of the home. At settlement, subordinate lien holders will receive a certificate that evidences their interest as an obligation backed by HUD, with payment conditional on the value of HUD’s appreciation share.

If the home is sold or refinanced, the homeowner will share the equity with FHA on a sliding scale ranging from a 100 percent FHA share after the first year to a minimum of 50 percent after five years. The lien holder that previously held the highest priority will receive payment up to a proportion of its original interest, not to exceed the amount of available appreciation. This type of delayed payoff will take place until all prior lien holders are satisfied or the amount of available appreciation is exhausted. All remaining appreciation is remitted to FHA.

The HOPE for Homeowners Board of Directors includes HUD Secretary Steve Preston, Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke, and FDIC Chairman Sheila Bair. They have named the following people to serve on the board as their designees: FHA Commissioner and Chairman of the Board Brian Montgomery, Federal Reserve Board Governor Elizabeth Duke, Treasury Assistant Secretary for Economic Policy Phillip Swagel, and Federal Deposit Insurance Corporation Director Tom Curry.