About Government Refinance and Home Purchase Programs

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.

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.

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.

Nobody yet seems to know exactly what it will take to get banks to agree to the new short refi/ HOPE loan program. We know the following for sure:

Eligible Borrowers. Only owner-occupants who are unable to afford their mortgage payments are eligible for the program. No investors or investor properties will qualify. Homeowners must certify, under penalty of law, that they have not intentionally defaulted on their loan to qualify for the program and must have a mortgage debt to income ratio greater than 31 percent as of March 1, 2008. Lenders must document and verify borrowers’ income with the IRS.

In other words this program only works on primary residences of borrowers. Also the current loan (including taxes and insurance) must have been more than 31% of your gross income as of 3/1/08. We also know for sure that the program does not officially begin until October 1, 2008.

New Loan Amount. The size of the new FHA-insured loan will be lesser of the amount the borrower can afford to repay, as determined by the current affordability requirements of FHA; or, 90% of the current value of the home. Loans must be 30-year, fixed rate loans.

While the old loan payment had to be more than 31% of your gross income, the new loan payment (with the loan amount at 90% of current appraised value) probably will need to be at or below 31% of gross income. That means that if you aren’t upside down (or have not had a significant income loss since March of ’08) this program may not work for you. You have to show you could not afford the old loan but you can afford the new one.

Equity & Appreciation Sharing. In order to avoid a windfall to the borrower created by the new 90% loan-to-value FHA-insured mortgage, the borrower must share the newly-created equity and future appreciation equally with FHA. This obligation will continue until the borrower sells the home or refinances the FHA-insured mortgage. Moreover, the homeowner’s access to the newly created equity will be phased-in over 5 years.

If you get a HOPE loan and sell your place within 5 years you must share profits with the FHA. After 5 years it is all yours.

Eligible Mortgages. In order to protect against adverse selection, the program prohibits the Secretary from paying an insurance claim whenever the representations and warranties required to be made by lenders are violated, or in cases in which a borrower has an early payment default and misses the first payment. The Act provides the Board the authority to establish other protections against adverse selection, such as requiring seasoning for certain higher risk loans before they can be insured under the program. Appraisers of property insured by FHA must be certified by the state where the property is located, or by a nationally recognized professional appraisal organization, and have “demonstrated verifiable education” in FHA appraisal requirements.

The FHA gets to reject insurance claims from banks if they don’t follow the rules. That means banks will likely be strictly following the rules.

Existing Subordinate Liens. Before participating in this program, all subordinate liens must be extinguished. This will have to be done through negotiation with the first lien holder.

Before you can get the new loan you need to convince all current mortgage holders to go for it. That will be tougher if you have two loans because the 2nd mortgage holder doesn’t have much incentive to agree. Normally with short sales you agree to pay a couple of thousand to the 2nd mortgage holder so they get something instead of nothing. Having two mortgages to pay off makes things trickier.

Credit requirements

Most banks currently have a minimum credit score requirement (though the FHA itself does not). Banks will need to ignore that requirement to allow people to get a HOPE loan. It remains to be seen how they will do that.

Making banks say “Uncle”

As we have said before, it seems likely that banks will view these loans the same way they view short sales on homes. That is, they won’t like them but they will say yes on occasion if they feel it will cost them less than actually foreclosing. The problem is that you will probably need to be on the cusp of being foreclosed and evicted before banks will finally relent so the HOPE loan program really is a last ditch effort to keep people from being evicted. It remains to be seen how many people it will keep in homes. But since it is designed to help about 400,000 people and there may be 4,000,000 foreclosures in the next couple of years we may be looking at a 10% chance for most people who are facing foreclosure.

The new housing legislation became law today when the president signed the bill this morning. Part of the new law is the “HOPE for Homeowners Act of 2008” which is designed to help people on the cusp of foreclosing. Here is a key excerpt taken directly from a summary page of the new legislation describing the new foreclosure-preventing HOPE loans:

B. Summary of the “HOPE for Homeowners Act of 2008″

The “HOPE for Homeowners Act of 2008” creates a new, temporary, voluntary program within FHA to back FHA-insured mortgages to distressed borrowers. The new mortgages offered by FHA-approved lenders will refinance distressed loans at a significant discount for owner-occupants at risk of losing their homes to foreclosure. In exchange, homeowners will share future appreciation with FHA.

The program is built on five principles:

1. Long-term affordability. The program is built on the idea, expressed by Federal Reserve Chairman Bernanke, that creating new equity for troubled homeowners is likely to be a more effective way to avoid foreclosures. New loans will be based on a family’s ability to repay the loan, ensuring affordability and sustainable homeownership.

2. No investor or lender bailout. Investors and/or lenders will have to take significant losses in order to benefit from the proceeds of the loans refinanced with government insurance. However, these losses would be less than the losses associated with foreclosure.

3. No windfall for borrowers. Borrowers will share their new equity and future appreciation equally with FHA. Borrowers will pay for the FHA insurance.

4. Voluntary participation. This will be a voluntary program. No lenders, servicers, or investors will be compelled to participate.

5. Restore confidence, liquidity, and transparency. Credit markets are fearful and frozen in part because banks and other financial institutions do not know what their subprime mortgages and related securities are worth. The uncertainty is forcing lenders to hoard capital and stop the lending necessary for economic growth. This program will help restore confidence and get markets flowing again.

…

Eligible Borrowers. Only owner-occupants who are unable to afford their mortgage payments are eligible for the program. No investors or investor properties will qualify. Homeowners must certify, under penalty of law, that they have not intentionally defaulted on their loan to qualify for the program and must have a mortgage debt to income ratio greater than 31 percent as of March 1, 2008. Lenders must document and verify borrowers’ income with the IRS.

New Loan Amount. The size of the new FHA-insured loan will be lesser of the amount the borrower can afford to repay, as determined by the current affordability requirements of FHA; or, 90% of the current value of the home. Loans must be 30-year, fixed rate loans.

Equity & Appreciation Sharing. In order to avoid a windfall to the borrower created by the new 90% loan-to-value FHA-insured mortgage, the borrower must share the newly-created equity and future appreciation equally with FHA. This obligation will continue until the borrower sells the home or refinances the FHA-insured mortgage. Moreover, the homeowner’s access to the newly created equity will be phased-in over 5 years.

Eligible Mortgages. In order to protect against adverse selection, the program prohibits the Secretary from paying an insurance claim whenever the representations and warranties required to be made by lenders are violated, or in cases in which a borrower has an early payment default and misses the first payment. The Act provides the Board the authority to establish other protections against adverse selection, such as requiring seasoning for certain higher risk loans before they can be insured under the program. Appraisers of property insured by FHA must be certified by the state where the property is located, or by a nationally recognized professional appraisal organization, and have demonstrated verifiable education in FHA appraisal requirements.

Existing Subordinate Liens. Before participating in this program, all subordinate liens must be extinguished. This will have to be done through negotiation with the first lien holder.

Qualified Safe Harbor. The legislation provides servicers with an incentive to participate in the program by offering a safe harbor against legal liability.

Program Size. The program is authorized to insure up to $300 billion in mortgages and is expected to serve approximately 400,000 homeowners.

Program Sunset. The program will begin October 1, 2008 and sunset on September 30, 2011. CBO say the program will net nearly $250 million for taxpayers. The program is paid for by using part of the Affordable Housing Trust Fund; the GSE bill provides a further $2 billion cushion for the government by establishing a reserve fund at Treasury over ten years. If the program costs less than projected, the unused funds are returned to the Affordable Housing Trust Fund. If the program more than pays for itself (as was the case during the Roosevelt Administration), any excess savings are dedicated to reducing the national debt.

CNNMoney.com published a pretty good article listing some more requirements for people hoping to qualify for a “HOPE loan”, or the new FHA backed short refi loans that will soon be available. Here are a few highlights from that article:

Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must be spending at least 40% of their gross monthly income on all household debt to be eligible for the program.

They can be up to date on their existing mortgage or in default, but either way borrowers must prove that they will not be able to keep paying their existing mortgage – and attest that they are not deliberately defaulting just to obtain lower payments.

Before homeowners can get FHA-backed mortgages, they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity loan for at least five years, unless it’s to pay for necessary upkeep on the home.

To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home’s appraised value at the time.

If you think you meet these requirements then we can help you look at applying for the program. Rumor has it the new rules could go into effect on October 1, 2008. Bookmark this site and keep coming back here for more updates. Then fill in our contact form as we get closer to the date if you are currently upside down on your home.

Who will qualify for the new FHA short refi program? It is not entire clear still. But there was an excellent article recently by a guy over at the Washington Post that at least lays out some details in the pending bill. Here are some excerpts form that:

But what are the specifics? Who will qualify for help? How quickly will HOPE be up and running and for how long? Are there any drawbacks or limits?

Here’s a quick overview:

Congress’ basic idea is to save people on the edge: families and individuals at immediate risk of losing their houses who could avoid that if their mortgage balances and interest rates were significantly reduced.

The program will be voluntary–a crucial condition. Lenders and investors who own defaulting mortgages cannot be compelled to allow their borrowers to refinance.

Lenders will have to agree to substantial write-downs of principal and penalties owed to them. The new maximum HOPE loan amount, insured by the Federal Housing Administration under a fund created by the legislation, will be 90 percent of the current market value of the property.

Plus, FHA will impose an upfront insurance fee of 3 percent of the new loan amount, payable out of refinancing proceeds that would otherwise go to the original lender. Lenders also will have to clear potential issues with holders of second liens on properties–typically banks who’ve extended equity lines or second mortgages and have a claim on refinancing proceeds–before participating in HOPE.

There are important hurdles borrowers must clear as well. They must:

-Demonstrate a “lack of capacity” to pay their mortgage but have enough income to make payments on a smaller, fixed-rate FHA loan. Their income-to-mortgage debt ratio must top 35 percent.

-Certify to the government that they haven’t “intentionally defaulted” on their mortgage or on any other debt to refinance into a HOPE loan. They must also certify that they are telling the truth about their financial status and have never been convicted of a fraud. Anyone who lies on their application will be subject to penalties, including up to five years in prison.

-Agree to use and occupy the refinanced house as their principal residence and not own any additional houses.

This HOPE loan program is slated to run from October of 2008 through September 2011 at latest. Borrowers would automatically have at least 10% equity in their home at the time of the the HOPE loan refi but if they sold the house at a profit later they would have to give some or all of the profits to the FHA depending on how quickly they sold the home.

As we mentioned in an previous editorial, the wild card remains the lenders. In what situations would they be willing to go along with a HOPE loan? We suspect that the banks only would go for this kind of loan if they were absolutely convinced it was their least expensive alternative in an obvious foreclosure situation. So while the new legislation might provide “HOPE” for some, it is not yet clear how many foreclosure it will really prevent.

There was a good article over at the Washington Post recently digging in to some of the details on the pending housing bill. Here is an interesting quote from the article:

The portion of the legislation that deals with financially distressed homeowners would help an estimated 400,000 borrowers. It is restricted, however, to owners who cannot afford their current loans and have a mortgage-debt-to-income ratio above 31 percent. The owner of the mortgage — either a lender or bond investor — must agree to reduce the balance of the principal amount to 85 percent of the current market value — i.e., write off a significant chunk of what’s owed.

If these and other conditions are met — including homeowners agreeing to split any future appreciation with the government — borrowers may qualify for a new fixed-rate, 30-year FHA loan they can more easily afford.

It is still not clear whether that is 31% of the old mortgage or 31% of the new mortgage. We hope and assume it is of the old mortgage. Stay tuned for more details on that.

Kudos to the folks over at the New York Times for tackling the perplexing issue of how the new housing legislation will really play out when it passes. The idea of helping people who are upside down on their mortgages refinance into FHA backed loans is nice but there are lots of questions to be answered. Here is an excerpt from the recent NYT article:

The effectiveness of the bill will depend to some extent on how it is handled by the F.H.A., an agency created during the Great Depression to insure home loans. It will have several challenges: persuading the lenders who made second mortgages and home equity loans to cooperate; screening loans to make sure borrowers have a good shot at keeping their homes after refinancing; and weeding out those trying to take advantage of the system.

Second mortgages and home equity loans were popular during the housing boom and often allowed Americans to buy a home with little or no money down or let them take out cash against their homes as prices rose. Now, home values have fallen so much that there is little or nothing left to pay off these loans when homes are sold or repossessed. The Congressional Budget Office estimates that about 40 percent of riskier mortgages made in recent years are coupled with such secondary loans.

Under the Congressional plan, these loans would have to be eliminated before homes could be refinanced. People who negotiate loan modifications say holders of second loans have been reluctant to take losses, and lenders with first loans are often unwilling to give them enough money to secure their cooperation. Under the Senate version of the plan, the F.H.A. would have some leeway in negotiating with borrowers who have second loans.

Another challenge for the F.H.A. would be selecting borrowers who have the best chance of paying off new loans. The agency would have to make sure lenders are not unloading only their worst loans, and lenders and the F.H.A. would have to guard against borrowers who can pay their current loans but would like a cheaper, government-backed loan.

How will they guard against people trying to fake it and get a cheaper loan? I have no idea. I worry that no one knows. It seems likely to me that banks will end up playing “chicken” with borrowers they think are bluffing. It also seems like this new legislation will encourage people to play that kind of game. We’ll see.