About Government Refinance and Home Purchase Programs

The Fed today announced another hard-to-understand plan aimed at easing the credit mess the US is in. See articles here and here. The end result of this one could be lower mortgage rates for all though. That is good news for anyone considering a refinance. It is also good news for anyone looking to purchase a home. In fact, it might be good news for all because the more people can refi and purchase the more housing prices will stabilize. If housing prices can turn around the economic woes we currently face could decline dramatically as well.

Sheila Bair, the head of the FDIC continues to buck the Bush Administration and call for about $25 Billion of the $700 Billion bailout package to be used to insure banks and give them more incentive to modify the loans of more troubled homeowners. Here is an excerpt from a recent AP story:

FDIC Chairman Sheila Bair said Thursday she is “still hopeful” of using federal bailout money to help homeowners avoid foreclosure.

“The issue is whether it’s an appropriate use of (Treasury bailout) funds or not, we think it is,” Bair said in a breakfast speech hosted by the Johns Hopkins University Carey Business School. “We think it’s a good investment and so we are meeting with both Congress and the Secretary of the Treasury on that still.”

When asked about resistance from Treasury Secretary Henry Paulson, Bair said: “We have a great working relationship and I’m still talking with him. So, still hopeful.”

…

The FDIC chairman has broken with the Bush administration in calling for using $24 billion of the bailout money to help Americans at risk of losing their homes. House Speaker Nancy Pelosi is urging Paulson to support the FDIC plan.

Federal Reserve Chairman Ben Bernanke told lawmakers earlier this week that in cases of some home loans, the FDIC plan could be costly but is still a “very promising approach.” While resistant to using bailout money to provide mortgage guarantees, Paulson has said the administration will look for ways to provide foreclosure relief.

It looks like the bosses at Freddie Mac and Fannie Mae want to buy a little time for their new loan modification program to take hold. In order to do that they have called for a halt on foreclosures until the start of 2009. Here are some excerpts from a CNNmoney.com article on the subject:

NEW YORK (CNNMoney.com) — Mortgage giants Fannie Mae and Freddie Mac have directed their network of servicers to halt all foreclosure and eviction proceedings between Nov. 26 2008 and Jan. 9, 2009, meant to give a recently announced rescue plan time to work.

The Streamlined Modification Program, set to launch Dec. 15, enables delinquent borrowers to get a modified mortgage that lowers payments to no more than 38% of their gross incomes.

That’s accomplished by reducing mortgage rates, extending the term of the loans or deferring mortgage principals, or a mix of all three.

“By delaying these foreclosure sales, the nation’s servicers will have the opportunity to work with more borrowers who could qualify for a modification under the new [program],” said Freddie Mac CEO David M. Moffett in a statement.

Freddie has told its servicers to immediately contact the 6,000 borrowers who already have auction sales or evictions scheduled for between the specified dates to tell them the sales are postponed. Fannie estimated that 10,000 of its borrowers will be affected. Borrowers facing eviction between Nov. 20 and Nov. 26 were not expected to get relief.

The release can also be found here.

BUSH ADMINISTRATION ANNOUNCES FLEXIBILITY FOR “HOPE FOR HOMEOWNERS” PROGRAM
Changes will allow more struggling families to use the program and keep their homes

WASHINGTON – U.S. Housing and Urban Development Secretary Steve Preston today announced that the HOPE for Homeowners (H4H) Board of Directors has approved changes to the program to help more distressed borrowers refinance into affordable, goverment-back mortgages. The changes will reduce the program costs for consumers and lenders alike while also expanding eligibility by driving down the borrower’s monthly mortgage payments.

“Clearly, meaningful changes were needed. These modifications should increase lender participation and help more families who are having difficulty paying their existing morgages, but can afford a new affordable loan insured by HUD’s Federal Housing Administration,” said Preston.

By taking full advantage of the new authority provided under the Emergency Economic Stabilization Act (EESA) of 2008, HOPE for Homeowners will provide additional mortgage assistance to struggling homeowners.

Modifications to HOPE for Homeowners include:

* Increasing the loan to value ratio (LTV) to 96.5 percent for some H4H loans;
* Simplifying the process to remove subordinate liens by permitting upfront payments to lienholders; and
* Allowing lenders to extend mortgage terms from 30 to 40 years.

“These changes will further encourage lenders to take a hard look at this program before heading down the path to foreclosure and will provide families with another resource to refinance into a loan they can afford,” said FHA Commissioner Brian D. Montgomery. “HOPE for Homeowners will continue to serve as another loss mitigation tool that can be used to help families keep their homes.”

HOPE for Homeowners will continue to only offer affordable, government-insured fixed rate mortgages. Further, this program will maintain FHA’s long-standing requirement that new loans be based on a family’s long-term ability to repay the mortgage. Only owner-occupants are eligible for FHA-insured mortgages.

Background

Increasing the Loan-to-Value and Adjusting Debt-to-Income Ratios

The program will increase the loan-to-value ratio (LTV) on H4H loans to 96.5 percent for borrowers whose mortgage payments represent no more than 31 percent of their monthly gross income and household debt no more than 43 percent. This change will expand the number of eligible borrowers. Raising the loan-to-value ratio reduces the gap between the existing loan balances and the new H4H loan and decrease losses to the existing primary lienholders. Alternatively, the program will continue to offer borrowers with higher debt loads a 90 percent loan-to-value ratio on their H4H loans. This LTV ratio will include borrowers with debt-to-income ratios as high as 38 and 50 percent. In conjunction with the LTV change, H4H will eliminate the trial modification that was previously required. This measure was too complicated and required delicate negotiations among the existing lienholders, the new H4H lender, and the borrower.

Immediate Payments to Subordinate Lienholders

H4H will offer subordinate lienholders an immediate payment in exchange for releasing their liens, to permit more borrowers access to the program. Previously, subordinate lienholders who released their liens were only eligible to receive a small recovery payment when the home owned by the H4H borrower was sold. Given the amount of time that would pass between the creation of the H4H and the ultimate sale of the home, as well as the tremendous market uncertainties, subordinate lienholders were not guaranteed any return at all. To address this problem, the subordinate lienholders may now receive an immediate payment at the time the H4H loan is originated.

Extending Loan Terms from 30 to 40 years

To assure that borrowers are put into the most affordable monthly payment possible, HOPE for Homeowners will permit lenders to extend the mortgage term from 30 to 40 years. For borrowers with very high mortgage and household debt loads, extending out the amortization period may reduce their monthly payments enough to make it possible for them to qualify for this rescue product and save their homes.

Consistent with statutory and regulatory requirements, borrowers must continue to meet the following criteria:

* Their mortgage must have originated on or before January 1, 2008.

* They cannot afford their current loan.

* They must have made a minimum of six full payments on their existing first mortgage and did not intentionally miss mortgage payments.

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

* 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.

* They do not own a second home.

* They did not knowingly or willfully provide false information to obtain the existing mortgage, and they have not been convicted of fraud in the last 10 years.

* They must follow FHA’s long-standing and strict policy of fully documented income and employment.

The HOPE for Homeowners program was authorized by the Housing and Economic Recovery Act of 2008. A Board of Directors 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 program began October 1, 2008, and will end September 30, 2011.

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.

HUD is realizing that the current HOPE for Homeowners (H4H) plan just isn’t working today it anoounced some important modifications to the program. We get this from a recent MarketWatch article on the subject:

The changes will give lenders a greater incentive to participate, by allowing them to write off less of the loan value than under the previous rules. Homeowners will benefit from lower monthly payments, but the loan’s term may be extended to as much as 40 years. The provisions will change the rules based on “Hope for Homeowners” legislation passed by Congress in July.

Under the new rules, homeowners won’t have to spend more than 31% of their monthly income on their house payment. For the lenders, the rules will allow them to write down a loan to 96.5% of the home’s actual value, rather than to 90% as under the old rule.

“These modifications should increase lender participation and help more families who are having difficulty paying their existing mortgages, but can afford a new affordable loan insured by HUD’s Federal Housing Administration,” said HUD Secretary Steve Preston.

In addition to income and spending restrictions, participating homeowners also can’t have household debt service of more than 43% of their monthly income. The new measure also can allow participating lenders to have their loan terms extended to 40 years from 30 years.

A number of existing Hope for Homeowners rules still apply. The mortgage must have originated before Jan. 1, 2008 and the loan amount can’t exceed $550,440.

In addition to easing up on some of the standards, there was also a provision added to make 2nd mortgage holders more likely to agree to the program:

The new HUD rules will also help second lien holders by providing them cash settlements up front to release their liens and clear the way for a refinance transaction with the Federal Housing Administration. The Treasury Department has issued bonds to pay second lien holder institutions to release their liens. The details of how much second lien holders will receive have yet to be released by HUD.

This provision was also received enthusiastically by the mortgage lending community. “By agreeing to immediately compensate subordinate lienholders, HUD is providing additional incentive for those lienholders to release their liens, which will free more borrowers to access the Hope for Homeowners Program,” Courson said.

While these more aggressive standards will surely help, only time will tell if the H4H program will take off or will continue to look dead on arrival as it has so far.

See an AP article on this subject here. The important part about the FDIC plan is that it is much more aggressive and broad than the similar plan the White House and Fannie and Freddie announced earlier this week.

The idea behind this plan is that the FDIC wants to give more financial incentive to banks to modify more loans and keep more people in their homes. That incentive would come in the form of the FDIC partially insuring modified loans that meet certain requirements. The new payments on modified loans must reportedly be 31% or less of the gross monthly income of the owner. This might be a very good solution for people who are currently upside down on their mortgages since the Hope For Homeowners plan has been a major flop so far.

As we have reported here, the Hope For Homeowners program is a flop so far. Government officials are seeing the same things we are. In an AP story we get this:

The government may let more borrowers qualify for a $300 billion program designed to let troubled homeowners swap risky loans for more affordable ones, a top Bush administration official said Wednesday.

The program, included in a housing bill passed by lawmakers over the summer, was launched Oct. 1. But there are concerns that lenders won’t participate because they have to voluntarily reduce the value of a loan and take a loss.

“We’re concerned that the program — as constructed today — is limiting people’s availability,” Department of Housing and Urban Development Secretary Steve Preston said in an interview with Associated Press writers and editors.

In the “Hope for Homeowners” plan’s current design, lenders have to take a big loss. They must absorb the difference between the current mortgage’s value and the new loan for 90 percent of the house’s current appraised value. One potential change is to make the new loan around 97 percent of the current home value, thus requiring lenders to take a smaller loss, Preston said.

Making that change and others “would open up participation in the program,” he said.

We get this from the fine folks over at CNNmoney.com:

The Bush administration on Tuesday unveiled a new program to modify mortgages and stabilize the battered real estate market, but the plan stops short of providing direct government financial help to at-risk homeowners.

The plan centers on Fannie Mae and Freddie Mac, which between them own or back about 31 million mortgages worth a combined $5 trillion. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages.

Homeowners who are 90 days or more late in their mortgage payments, who live in the home on which the mortgage was taken and have not filed for bankruptcy are eligible – assuming that loan is owned by Fannie or Freddie.

Their mortgage payments would be adjusted through lower interest rates or longer repayment schedules with the goal of bringing payments below 38% of monthly household income.

See the AP story on this plan here. Here is a quote from that article:

To qualify, borrowers would have to be at least three months behind on their home loans, and would need to owe 90 percent or more than the home is currently worth. Investors who do not occupy their homes would be excluded, as would borrowers who have filed for bankruptcy.

Borrowers would get help in several ways: The interest rate would be reduced so that borrowers would not pay more than 38 percent of their income on housing expenses. Another option is for loans to be extended from 30 years to 40 years, and for some of the principal amount to be deferred interest-free.

This is a different approach that the Hope For Homeowners (H4H) plan that has largely failed so far. The idea here is to simply lower payments for people who can’t keep up by either reducing interest rates or lengthening the term or both. Banks will be much more interested in this sort of plan than they were in the H4H plan because they are not required to eat huge losses when they modify loans. If it works, this will likely keep a lot of people in their homes and that will be good for everyone.

You must have a Fannie Mae or Freddi Mac backed loan to qualify for this plan and it sounds like it only applies to people who have fallen at least 90 days behind on payments. Contact your lender if you are that far behind and see if they are willing to modify your loan.

The $700 billion bailout money has been set aside but there is a lot of jockeying going on trying to decide how to help slow down the wave of foreclosures at the heart of the world financial crisis. The FDIC is working up a plan that would give incentive to banks to modify loans rather than foreclose on people by offering to insure those modified loans against foreclosure. The White House is skeptical of that plan because they say it will give homeowners incentive to go delinquent on loans in order to get better terms. All in all, this is a mess that is going to take a long time to clean up. See a recent WSJ article on the subject here.

There was a sobering story over at Businessweek.com discussing the lack of success so far for the H4H program. Here are some excerpts:

The government expects only 20,000 troubled borrowers will apply to refinance into more affordable home loans by next fall under a new mortgage aid program passed by lawmakers over the summer.

The $300 billion ‘Hope for Homeowners’ program was launched Oct. 1. Designed by lawmakers eager to respond to the mortgage crisis, the Congressional Budget Office had projected it would let 400,000 troubled homeowners swap risky loans for conventional 30-year fixed rate loans with lower rates.

But the early results are discouraging: the government received only 42 applications in the program’s first two weeks, according to the Federal Housing Administration. The low turnout was first reported by the industry newsletter Housing Wire. Since the applications take about 60 days to process, no loans have been approved yet.

20,000 instead of 400,000 people helped? That is 95% less than expected. If this were a business it would be considered a catastrophic failure. The article continued:

“It just reinforces that none of the federal efforts to date seem to be getting the job done,” said mortgage industry consultant Howard Glaser, a former housing official in the Clinton administration. “There’s just no question that when a new president and Congress come back to town, they’re going to take much more aggressive intervention.”

…

Meanwhile, consumer advocates and the banking industry alike have been eagerly awaiting an announcement of an ambitious plan to help around 3 million borrowers avoid foreclosure, though it remained uncertain whether the Bush administration would do so.

“The question on the table is, do we need to do more to help homeowners? If that answer is yes, then there’s a lot of other issues that have to be analyzed,” White House press secretary Dana Perino said Monday.

Still, many believed the Bush administration would eventually act, as foreclosures continue to skyrocket. “I think they finally get it,” said John Taylor, president of the National Community Reinvestment Coalition, a consumer group in Washington.

Who knows what the government will come up with but so far the plans they have tried (FHASecure and Hope 4 Homeowners) aren’t coming close to making a broad difference.