About Government Refinance and Home Purchase Programs

Over the last few years there has been a lot of buzz about principal reduction programs for underwater homeowners. The FHA even came out with some guidelines related to a principal reduction program in 2010. The problem was, none of the principal reduction programs announced were mandatory. That means the banks were left to voluntarily forgive debts. As you can imagine, banks were not anxious to give money away.

However, principal reductions can and do make sense in some cases for banks. For example, foreclosing on a home is a long and expensive process for a bank and in some cases a bank determines that it would be financially better off reducing the principal owed on a home and keeping the current borrower in the house than going through a long foreclosure process and then selling the bank-owned home at a steep discount. Losing $30,000 with a principal reduction is better than losing $60,000 after a long foreclosure and home sale process. Other reasons to reduce principal exist as well.

Each potential principal reduction case is unique and should be looked at individually. If you are researching a principal reduction, contact us in the form on the right to have one of our counselors look at your situation and point you in the right direction.

While the idea was admirable, the execution was a failure.

The idea of the FHA short refinance program was to give lenders some incentive to avoid foreclosing on distressed, underwater homeowners by refinancing them in to an FHA loan at the current market value of the home. The primary incentive was supposed to be that doing so would cost lenders less money than foreclosing.

Unfortunately, in practice banks were appalled at the idea of forgiving debt on a massive scale. Lenders were especially afraid that if they started granting short refinances to some borrowers it would open the flood gates and upside down borrowers all over the country would start intentionally defaulting on their loans in or to get a principal reduction. Because the FHA short refinance program was voluntary and only offered very minor incentives for lender participation, the program was dead on arrival. Some large lenders have granted some token principal reductions as part of the large settlement they agreed to with the federal government, but overall the FHA short refinance program never got off the ground.

However the good news is there are several very useful government-backed refinance programs for upside down borrowers that did gain traction. While they aren’t principal reductions, the programs that are up and running can massively reduce interest rates and monthly payments for borrowers. Contact us in the sidebar today to learn more.

All FHA loans started on Monday April 18th, 2011 or later will have higher monthly mortgage insurance fees than loans started the previous Friday. The FHA is raising its monthly mortgage insurance fees by 0.25% across the board beginning then. The fees will not be retroactive but will apply to all new FHA refinances or purchase loans.

Here is what a 0.25% mortgage insurance fee would mean:

On a $150,000 30 year fixed FHA loan the monthly insurance fees will cost an additional 0.25% per year. That means the insurance fee would be $31.25 per month higher than the same FHA loan started the previous week. ($150,000 x .25% / 12 = $31.25). On a $250,000 FHA loan the mortgage insurance fees would jump $52.08 per month.

So these fee hikes can be significant and the larger the loan the more of a difference the change will make. If you have considered an FHA loan or if you already have an FHA loan you would like to streamline to a lower rate it would be wise to at least start an FHA loan application by Friday April 15 in order to avoid mortgage insurance fee hike. Contact in the sidebar for details on how to get started.

Principal reductions have thus far been more of a myth than a reality in the marketplace. The problem is that banks aren’t anxious to forgive debts. As a result the programs that require banks to write down principal like the FHA short refi program have been major flops so far. But Bank of America has recently announced that it will increase the number of loan write-downs it does in certain hard hit states. We get this from a recent HousingWire article:

Bank of America sent letters to Arizona homeowners who may qualify for mortgage assistance, including a principal writedown, under the Treasury Department’s Hardest Hit Fund.

In June 2010, the Obama administration released $1.5 billion in foreclosure prevention funding for states hardest hit by home price declines. BofA said Wednesday the write downs will go to homeowners experiencing financial hardship and owe considerably more on the mortgage than the property is worth.

It is still unclear what would persuade the folks at BofA to write down the principal on a loan. In all likelihood it would require a situation where a borrower is significantly late on payments and on the verge of foreclosing anyway. In such a case the bank may decide that it would be less expensive to write down the principal and keep the occupants in the house than it would be to proceed with a foreclosure, an eviction, and then the process of listing and selling the foreclosed property.

In any case, principal write-downs are still the exception rather than the rule. And they remain entirely at the discretion of the lenders.

However, borrowers who currently have an FHA loan or who have conventional loan backed by Fannie Mae or Freddie Mac still have refinance options even when they owe more than the home is worth. While refinancing doesn’t reduce the principal it can reduce payments. In addition, borrowers control their own destinies with refinances whereas loan modification requests (including requests for principal reductions) leave borrowers at the mercy of the lender.

Contact us in the sidebar for more information.

The new FHA short refi program is set to begin on Tuesday September 7. See technical details on the program here and an editorial about the difficulties the program may face here.

Also here are some excerpt from a recent WSJ article on the pending program:

Officials say between 500,000 and 1.5 million so-called underwater loans could be modified through the program, the first initiative to target homeowners who are current on their mortgage payments but are at risk of default because they have no equity in their homes. Some experts are warning, however, that the same knots that tied up prior initiatives could do so again.

Under the new “short refinance” program, banks and other creditors that write down mortgages to less than the value of the property can essentially hand off the reduced loan to the government. The process involves refinancing borrowers into loans backed by the Federal Housing Administration.

Fill in the form on the right to have one of our counselors answer more questions about available programs.

The FHA recently announced the details of its new short refinance program. The idea of being able to obtain a short refinance has many borrowers excited about the prospects of having tens or even hundreds of thousands of dollars of debt wiped away. The problem is that lenders are normally not at all excited in losing tens or hundreds of thousands of dollars and the new program requires the full cooperation and approval of those lenders.

Lenders question: What’s in it for us?

Mortgage lenders/banks are for-profit institutions so they will always ask “what’s in it for us?” when a borrower seeks a loan modification or short refinance. In the case of the new FHA short refinance program we fail to see the benefit to lenders for participating. Normally the only time a lender would seriously consider participating in a principal write-down is if the only choices left to them were to foreclose on a property or to grant a short refinance. That is because foreclosing usually is more expensive for the lender than the principal write-down would be. But based on the requirements of the new FHA program lenders will never be faced with those two options. That is because once a borrower falls behind on mortgage payments that borrower is no longer qualified for the FHA short refinance program to begin with. In other words, there is virtually nothing to gain for a current lender to agree to write down principal on mortgage because the people asking for them to employ the new FHA short refi program are not considered foreclosure risks to begin with.

The one thing that the new program does do is clear away some of the regulatory snags regarding getting an FHA loan. But based on what we can see so far, the fundamental idea behind the plan is deeply flawed and thus we don’t expect to see very many lenders granting these kinds of principal write downs at all.

Don’t give up

While we are skeptical of this new program there are several other programs in place that have a proven track record. Please contact us in the sidebar today to learn more about the available programs that could assist your family.

Here are some of the details from the recent published FHA mortgagee letter on the new FHA short refinance program. Contact us in the sidebar to learn more about the programs that best apply to you:

On March 26, 2010, the Department of Housing and Urban Development (HUD) and the Department of the Treasury (Treasury) announced enhancements to the existing Making Home Affordable Program (MHA) and Federal Housing Administration (FHA) refinance program that will give a greater number of responsible borrowers an opportunity to remain in their homes. These enhancements are designed to maintain homeownership by providing borrowers, who owe more on their mortgage than the value of their home, opportunities to refinance into an affordable FHA loan. This opportunity allows borrowers who are current on their mortgage to qualify for an FHA refinance loan provided that the lender or investor writes off the unpaid principal balance of the original first lien mortgage by at least 10 percent. …

Eligibility
Participation is voluntary and requires the consent of lien holders. In order for a loan to be eligible, the following conditions must be met:

1. The homeowner must be in a negative equity position;
2. The homeowner must be current on the existing mortgage to be refinanced;
3. The homeowner must occupy the subject property (1-4 units) as their primary residence;
4. The homeowner must qualify for the new loan under standard FHA underwriting requirements and possess a “FICO based” decision credit score greater than or equal to 500;
5. The existing loan to be refinanced must not be a FHA-insured loan;
6. The existing first lien holder must write off at least 10 percent of the unpaid principalbalance;
7. The refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent;
8. Non-extinguished existing subordinate mortgages must be re-subordinated and the new loan may not have a combined loan-to-value ratio greater than 115 percent;
9. For loans that receive a “refer” risk classification from TOTAL Mortgage Scorecard (TOTAL) and/or are manually underwritten, the homeowner’s total monthly mortgage payment, including the first and any subordinate mortgage(s), cannot be greater than 31 percent of gross monthly income and total debt, including all recurring debts, cannot be greater than 50 percent of gross monthly income;
10. FHA mortgagees are not permitted to use premium pricing to pay off existing debt obligations to qualify the borrower for the new loan;
11. FHA mortgagees are not permitted to make mortgage payments on behalf of the borrowers or otherwise bring the existing loan current to make it eligible for FHA insurance; and
12. The existing loan to be refinanced may not have been brought current by the existing first lien holder, except through an acceptable permanent loan modification as described below.

Principal Write off
The mortgagee must ensure that the existing first lien holder writes off at least 10 percent of the unpaid principal balance on the first lien. The short payoff serves as payment in full for any debt extinguished.

…

Combined Loan-to-Value Ratio
Notwithstanding 24 CFR 203.32(c)(3), the combined amount of the new FHA-insured first mortgage and any subordinate non FHA-insured lien may not exceed 115 percent.

…

Second Lien Extinguishment and Servicer Incentive
To facilitate the refinancing of new FHA-insured loans under this program, Treasury will provide incentives to existing second lien holders who agree to full or partial extinguishment of liens effective on all case numbers assigned on or after September 7, 2010. To be eligible for incentives, the existing second lien mortgage servicer must: Execute a Servicer Participation Agreement with Treasury to participate in the Making Home Affordable Program; and, Agree to fully release the borrower from all obligations to repay the amount forgiven.

Existing second mortgage lien servicers will be entitled to a one time incentive of $500 for each successful closing. Existing second mortgage lien investors will be entitled to an incentive based on the combined loan to value of the existing lien and all senior liens associated with the mortgage.

The head of the FHA announced that the details of the new short refi program from the FHA should be available soon. Here are some bits from the HousingWire article on the subject:

US Department of Housing and Urban Development (HUD) secretary Shaun Donovan said details for a new “FHA Short Refinance” program would be announced this week, while speaking at the National Association of Real Estate Brokers (NAREB) conference in Fort Worth, Texas Tuesday.

According to a mortgagee letter sent out today, the new program would provide additional refinancing options to underwater homeowners starting Sept. 7. To be eligible for the new loan, the homeowner must be underwater but still current on the mortgage. A credit score of 500 or better is required, and the borrower’s existing first-lien holder must agree to write at least 10% of the unpaid principal balance.

It must bring the borrower’s combined loan-to-value ratio to no more than 115%. The existing refinanced loan cannot be an FHA-insured one. Once refinanced and insured by the FHA, it must have a loan-to-value ratio of no more than 97.75%.

Keep in mind that lenders must agree to the principal write down for this program to work and lenders have historically not been thrilled with that idea. The article continued:

Market players have come out saying a government-induced refinancing wave is unlikely. Barclays Capital, Credit Suisse and JPMorgan Chase have each said such a program would require too many logistical hurdles and would deviate away from recent monetary policy.

Contact us in the sidebar to learn more and see which programs apply to you.

The efforts to resurrect the Hope For Homeowners program are in full swing now. The House already passed a bill designed to loosen requirements for the program and increase incentives for lenders to participate. The Senate just passed a similar bill today. The next step is for the two bodies to draft a melded final bill and push toward final votes. Here are some excerpt from a recent AP story on the subject:

Trying to curb home foreclosures, the Senate voted on Wednesday to make it easier for homeowners with risky credit to switch to a lower-cost mortgage backed by the government.

The bill, passed 91-5, also would give banks a break by encouraging reduced fees they must pay for the government to insure deposits.

While both steps put taxpayer money on the line, lawmakers say the legislation is needed to prevent the economy from getting worse.

…

The Senate housing bill would expand an existing $300 billion program called “Hope for Homeowners,” which encourages lenders to write down an individual’s mortgage if the homeowner agrees to pay an insurance premium. The program, which is set to expire in 2011, is intended to swap out a homeowner’s high-interest rate for a 30-year fixed loan backed by the Federal Housing Administration.

So far, the program has been a dud.

When it was established last year, Congress envisioned helping some 400,000 troubled homeowners. But because eligibility requirements were so strict, one borrower has completed the refinancing process

As part of the White House announcement today, news came out about attempts to revive the Hope For Homeowners (H4H) program. Hope For Homeowners was a program that was launched in late 2008 that allowed people to refinance into FHA loans at 90% of the current value of their home even if they are on the brink of foreclosure. Lenders would be required to write off losses on existing loans in cases where the value had dropped significantly but H4H was designed as a way for lenders to avoid having to foreclose on homes and lose even more money than the write off would cost. The problem was that lenders were not at all interested in writing off principal so the program was a colossal failure.

The Obama administration is this week announcing attempts to revive H4H in a workable fashion. See here from a recent article over at the WSJ on it:

The administration also announced a set of incentives for servicers and lenders participating in the

Hope for Homeowners program, which aims to restore homeowners’ lost equity by encouraging lenders to write down loan principal. The administration said it will take steps to incorporate Hope for Homeowners into its loan modification program. Servicers will be required to determine eligibility for a Hope for Homeowners refinancing and where it proves viable, the servicer would need to offer this option to the borrower.

While participation in the Hope for Homeowners program has been dismal, administration officials said they’re expecting strong investor interest as the program is wrapped into the broader federal loan modification program. The administration also said it supports legislation to strengthen the Hope for Homeowners program so that it can function effectively as a key part of the administration’s new housing efforts.

Changes to the Hope for Homeowners program are designed to place it in line with the taxpayer-assisted loan modifications. Launched last fall to help troubled borrowers refinance into more affordable government-backed loans, it has failed to gain traction due to onerous borrower requirements and the nagging problem of second liens.

The administration announced Tuesday a $2,500 up-front payment to servicers that refinance borrowers into the program. Meanwhile, lenders that originate the new loans will receive $1,000 a year for three years, if the loans stays current.

As we have documented here in the past, the recently launched H4H program was a colossal failure. There was an interesting article over at The Washington Independent that delved into why it was such a failure. There are three reasons listed:

1. The costs were too high to consumers
2. The program was voluntary so banks weren’t anxious to write off huge amounts of money when they could just wait and see if a better deal came along
3. The servicers of defaulting loans (third party companies hired to collect on mortgages after the mortgages are sold to investors as part of mortgage backed securities) were worried that if they went for and H4H deal instead of foreclosing they might get sued by the investors they work for so the went with the more familiar and lawsuit-immune route of foreclosures

We know from experience that #1 was not at all a reason for the failure of the program and anyone who says otherwise is out to lunch. People who are upside down and their homes and on the verge of foreclosure would have gladly accepted an H4H loan if one were available.

Reason #2 was and obvious problem because banks are always going to try to act in their own self interest. But reason #3 is a really interesting insight. It points out a structure and institutional problem that must be dealt with if the H4H program is to ever take off.

The other interesting idea is to relieve the already overworked and understaffed FHA department of the program. But I suspect they will need to fix problems 1-3 before that matters at all.

You know you have a disaster of a program on your hands when things go far more poorly than even skeptics warned about. Such is the fate of the Hope For Homeowners program so far. To date the research shows that about 300 H4H loans have actually been applied for and 0 — yep, precisely zero — H4H loans have funded. That is a spectacular failure of a program. At this point the players involved in creating the program are mostly pointing fingers.

At least it gives the skeptics a moment to gloat. Witness this editorial piece over at the Washington Post.