About Government Refinance and Home Purchase Programs

For the last several years homebuyers have been able to take advantage of a loophole in the FHA rules that allowed them to buy a house with no money down. One of the the results of the new housing legislation that just passed is that loophole is closing. Homebuyers will now need to bring at least a 3% down payment when purchasing a house with an FHA loan.

But there is good news for homebuyers in the new legislation too. Homebuyers can now receive up to a $7500 tax rebate. The qualifications for that program are:

1. The buyer cannot have owned a home in the last three years
2. The income of the buyer cannot exceed $75000 per year if single or $150,000 if filing jointly
3. It applies to homes purchased after April 9th of 2008 and sometime before July 1st of 2009
4. Must be a primary residence
5. The rebate is 10% of the purchase price of the home with a $7500 cap

So basically if you qualify and purchase a home this year you can expect up to an extra $7500 showing up in your tax rebate check.

Before you get too excited please note that this rebate is really just a tax free and interest free loan. The principle must be paid back to the IRS over the course of 15 years. Nevertheless, tax free and interest free money is good stuff. If you would like more information about this program please contact us. We help buyers get into government backed loans.

The economic stimulus package increased the FHA loan limits in most part of the country. In the most expensive areas of the country FHA loans can be up to $729,000 in 2008. But those limits expire at the end of 2008. The new maximum limits (as a result of the newly passed housing legislation) will range from $271,000 in lower cost areas to a maximum of $625,000. The limit is calculated by multiplying the median housing price in a county by 115%. (The conventional loan limits with Fannie Mae and Freddie Mac have the same upper limit but have a $417,000 low end no matter what the median housing price is in a county.)

See here to search current FHA loan limits by county.

There was an interesting article over in the Financial Times recently highlighting the issues homeowners with 2nd mortgages may face as they try to get a FHA short refi after October 1st. The HOPE loan program requires that any 2nd mortgage be resolved before one can refinance into a new FHA loan so 2nd mortgage holders have the power to scuttle attempts to refi. Here are some quotes:

“The second-lien holders have the potential to hold the process hostage because they ask, “What’s in it for me?”” said Michael Stevens, senior vice-president with the Conference of State Bank Supervisors.

“What’s the incentive for the second-lien holder to say, “I’m going to give up my security interest in the mortgage to keep the borrower in the home when I get nothing”?”

The problem could become widespread for borrowers seeking to refinance. Credit Suisse estimates that half of subprime homebuyers in 2006 took out a second mortgage for their purchases — and many other types of mortgage also have a second lien on the property. The second mortgage market is estimated at $1,000bn, SMR Research says.

Keith Johnson, president of Clayton Holdings, which collects mortgage payments, suggested government action might be needed to speed the renegotiating process. “You need a simple, easy, broad-based solution that I don’t know if anyone has really come up with yet,” he said. “You may need regulatory action.”

Traditionally, homeowners took second mortgages to refinance high-interest credit-card debt or pay for renovations. In recent years, homebuyers also have taken out second mortgages to finance downpayments. About 30 per cent of the second-lien market consists of such piggy-back mortgages, SMR Research says.

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.

There was an interesting article from the Dow Jones news service recently reporting that Barney Frank and friends in the Congress are asking top lenders to give the new HOPE loan / FHA short refi program a few months to get up and going before they foreclose on people. Here is an excerpt:

Top Democrats on the U.S. House Financial Services Committee sent a letter to several mortgage lenders Tuesday urging them to withhold issuing more foreclosures until a key mortgage rescue provision of the housing bill is phased in.

“We are calling upon servicers to forbear foreclosures for potentially eligible homeowners over the next few months,” the Aug. 5 letter said. The lawmakers added mortgage companies should “review their loan documents and prepare to refinance eligible borrowers by October 1” under a Federal Housing Administration refinancing program that was included in the housing bill.

The letter was signed by the panel’s chairman, Barney Frank, D-Mass., and three other committee Democrats. The letter acknowledges the mortgage industry has said it is willing to help borrowers facing foreclosure, but asks lenders to explain their mortgage review policies to the committee by Aug. 31.

There is no telling if lenders will heed the request yet.

It looks at least one congressman is trying to resurrect the downpayment assistance program. Part of the recent housing bill was a provision that halted a program that allowed people to buy a house through the FHA with no money down. The program was a blatant loophole in FHA regulations but it was a very useful loophole. FHA currently will finance up to 97% of the value of a home. Sellers are not allowed to pay that other 3% directly but buyers are allowed to use gift funds for the extra 3%. There was a loophole that allowed sellers to give the 3% to a “charity” organization with the understanding that this non-profit “charity” would then pay the other 3% of the purchase price on the house as a “gift” to a buyer. This work around was openly used and even defended in court a few years ago. The new legislation officially will put an end to these so-called charity organizations acting as a go-between in order to skirt the rules on downpayments.

The new law was championed by the FHA itself. The leadership of the FHA insisted that people who did not use their own money as a downpayment were significantly more likely to default on the loan later, leaving the FHA holding the bag on the foreclosed home. Proponents of the practice insist that the program opened the door for home ownership to millions of Americans who otherwise would not be able to buy.

There is a good article over at FortBendnow.com on the subject. Here is an excerpt:

Just before Congress recessed last week, Rep. Al Green (D-Houston) introduced a bill that would reinstate the FHA seller-funded down payment assistance loans.

Green, a member of the House Financial Services Committee, introduced HR 6694, also called that FHA Gift Down Payment Reform and Risk-Based Pricing Authorization Act of 2008, last Thursday. Green had previously attempted to include the down payment plan as a part of the American Housing Rescue and Foreclosure Prevention Act, which was signed by President Bush a week earlier.

Green’s provision was left out of the final version of the mortgage relief act that Bush signed.

Working with Housing Subcommittee Chair Maxine Waters and members of the Financial Services Committee, Green crafted the new legislation to allow borrowers with certain credit scores to obtain seller-funded down payment assistance through charitable organizations.

Green said mortgage assistance is a proven way to help Americans become homeowners.

There was a pretty good article over at the Christian Science Monitor about how long getting the new FHA short refi, aka “HOPE loan” program up and running will take. Here are some excerpts:

With more than 2 million foreclosures expected this year, who will be saved?

The short answer: This year, very few people.

Groups that help financially strapped homeowners are warning that the rules governing the new federal rescue may not be ready until October. Moreover, by the time the federal government gets ramped up, help may not be forthcoming until next year. That may be too late for the 1.8 million people who entered foreclosure proceedings in the first half of the year.

“The bottom line is [that] the full set of eligibility is not yet developed,” says Jim Carr, chief operating officer of the National Community Reinvestment Coalition in Washington. “Once the details are fleshed out, it will take months to ramp up and train people.” The idea is to help troubled borrowers who took out loans before Jan. 1, 2008. A homeowner has to be able to afford a loan worth 87 percent of the appraised value of his or her primary home. Just as important, the lending bank must agree to take a loss on the loan, which then becomes part of a federal portfolio, in essence owned by the Federal Housing Administration (FHA). The homeowner also must agree to split profits with Uncle Sam if the home rebounds in value and is sold.

“Implementation will be the biggest challenge,” says Sharon Price, director of policy at the National Housing Conference, a solution-oriented nonprofit based in Washington. “For example, it’s up to the lenders whether or not they want to participate.”

…

Mr. Tisler says his organization, which negotiates with mortgage servicers on behalf of financially strapped homeowners, is still not seeing enough of an interest by the banks in writing down the principal amount owed. Instead, he says, many banks would rather tack arrearages onto the back of a loan.

On Wednesday, Hope Now, a private-sector alliance of mortgage services, investors, and counselors, said it completed in June 181,000 workouts of loans to prevent foreclosure. In the past year, the group reports preventing 1.9 million loans from being foreclosed. More than half of the workouts were subprime loans – that is, loans made to people with less-than-stellar credit.

Faith Schwartz, executive director of Hope Now, says some solutions do involve tacking on missed payments. But “at the end of the day,” she says, “the payments are meant to be affordable.”

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.

See an article making the announcement here.

There was a pretty good article over in the Wall Street Journal recently that looks at the issue of banks only participating in the new FHA backed short refi program voluntarily. We have already speculated on how this might play out. Here are some useful quotes from the recent WSJ article:

For struggling U.S. homeowners, the success or failure of the program — which would let roughly 400,000 owners refinance into affordable, government-backed loans — depends largely on bankers’ willingness to take a partial loss on the loans and to reduce the amount of money borrowers owe.

Bankers say they will do it, but it isn’t clear how many loans they might be willing to restructure.

…

Experts say the program’s eventual participation could rise dramatically if home prices continue to drop — which could put more pressure on lenders to offer borrowers more assistance. Lawmakers are already pressing regulators and lenders to prepare now so the program can begin without delay when it goes into effect Oct. 1.

…

Taking a loss on a loan by writing down the principal owed is one of the least desirable options for loan servicers. They typically prefer to either lower the interest rate or extend the life of the loan — from 30 years, for example, to 40 years.

“The real problem is going to be, just like with every program out there, are the banks going to take this seriously?” said Rebecca Case-Grammatico, a staff attorney at the Empire Justice Center in Rochester, N.Y., who advises clients facing foreclosure. “And if they don’t, we’re in the same position we’ve been in all along.”

With an overwhelming vote of 72-13 the massive housing bill that Congress has been feverishly working on passed in a rare Saturday vote in the U.S. Senate today. The bill now goes to President Bush who is expected to sign it into law without any fanfare early next week. While there is opposition to the bill from some conservatives who complain that the government is “bailing out” too many Americans and American banks the vast majority of Congress has supported the legislation in response to the pain and needs of their constituents. The overwhelming votes in both the House and the Senate, along with the President’s announcement that he will not oppose the bill are indicative of its broad appeal to voters across the country.

Here are some FHA-specific provisions of the new bill as outlined in a recent AP article. The new law will:

_Give the Federal Housing Administration $300 billion in new lending authority and relax standards to provide affordable, fixed-rate mortgages to an estimated 400,000 debt-ridden homeowners. Any losses would be covered by an affordable housing fund financed by Fannie Mae and Freddie Mac, the government-sponsored companies that finance mortgages.

_Provide $3.9 billion in grants to the hardest-hit communities for buying and fixing up foreclosed property.

_Modernize the FHA and allow it to back loans for riskier borrowers. Permanently increase the size of loans the agency may insure — currently set to revert to $362,790 by the end of the year — to $625,000 in the highest-cost areas. The agency could insure loans 15 percent higher than the median home price in certain cities.

_Forbid the FHA from insuring mortgages in which the borrower’s down payment is paid by the seller, beginning on Oct. 1, 2008. Place a one-year moratorium forbidding the agency from charging premiums based on the riskiness of the homeowner, until Oct. 1, 2009.

_Provide $15 billion in housing tax breaks, including for low-income housing. Give a credit of up to $7,500 for first-time home buyers who purchase residences between April 9, 2008, and July 1, 2009. Allow people who don’t itemize their taxes to claim a $500-$1,000 deduction on their 2008 property taxes.

_Offer protection from investor lawsuits for mortgage holders that modify loans to borrowers who are in default or about to default.

_Provide $180 million for pre-foreclosure counseling and legal services for distressed borrowers.

The Senate will vote on the final version of the housing bill tomorrow and then send the bill to the president for final signature. The bill ought to officially become law by early next week. See here for a recent AP article in the subject.