About Government Refinance and Home Purchase Programs

An excellent recent article over at CNNmoney.com briefly overviewed the important parts of the new foreclosure prevention bill the congress has been cooking up this week. Here are some excerpts (italics are mine to emphasize key parts):

Congress isn’t done debating how best to stem the foreclosure crisis, but one near-certainty has emerged: Lawmakers will pull together a housing bill that expands Washington’s role in helping troubled borrowers.

Key legislators, Bush administration officials, banking regulators and the presidential candidates have lined up behind the idea of letting the Federal Housing Administration back new loans for homeowners at risk of foreclosure.

Several plans have been proposed. All of them would let the FHA insure mortgages for troubled borrowers whose lenders voluntarily write down loans to an affordable level. Once refinanced, the loans could be sold to investors, which in turn could grease the wheels of the mortgage market as a whole.
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Government risk will be a key area for compromise. To reach a deal, Seiberg said, negotiators must accomplish two things. First, make sure lenders give up enough principal so the government isn’t subsidizing them. And second, make sure borrowers pay enough – in premiums to the FHA and in equity to the government when they sell the house – to give the program the best chance of paying for itself.

Stay tuned folks. This debate is huge for those of you who can’t yet get even an FHA loan because you are upside down.

An idea that has been gaining popularity in Washington with both Democrats and Republicans is a new bill that would require lenders to allow troubled homeowners to refinance even if they are upside down (owe more than the home is worth) now. Some of the plans have banks allowing homeowners to refinance 85% of the current value of a home and forgiving the original full debt. There was an interesting article at MarketWatch recently on the developing plan. Here are some excerpts:

WASHINGTON (MarketWatch) — While the White House wants to avoid moves it sees as bailing out irresponsible mortgage borrowers, observers say it’s likely that lawmakers looking to be reelected this year will expand the reach of the Federal Housing Administration to keep more borrowers in their homes.

The House and Senate are trying to figure out the right way to widen the reach of the Depression-era agency, with Democrats favoring a large new financial responsibility, a move that concerns conservatives. But there are areas where consensus is developing, such as helping troubled borrowers to stay in their homes by encouraging lenders to write down loan values — a move that the Bush administration advocated last week through its targeted FHASecure program.

“We do think it’s a good development that the White House is agreeing to work with consumers with blemished credit,” said David Berenbaum, executive vice president with the National Community Reinvestment Coalition, a fair-lending advocate.

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“Legislatively it is our hope that a major commitment will be made to keep America’s working families in their homes,” Berenbaum said.

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On Wednesday the Senate Banking Committee heard from experts about foreclosure prevention. A plan from Chris Dodd, committee chairman, would create a fund at FHA to insure new, affordable mortgages for distressed homeowners.

“Under my proposal, no one — I repeat — no one, gets what could be described as a bailout,” Dodd said at the Wednesday hearing. “Lenders and investors will have to take a serious haircut to participate in the program. But, in return, they will receive more than what they would recover through foreclosure.”

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Details could also trip up passage of major FHA legislation. A key to most FHA plans is how great a write-down lenders would have to accept, said Allen Fishbein, director of credit and housing policy with the Consumer Federation of America.

“The situation is very much in flux,” Fishbein said. “Foreclosures are still continuing unabated and likely to increase in coming months, so you see support growing for some approach to use the FHA program to help borrowers avoid foreclosure.”

The Washington Post has an excellent article recently on the popular foreclosure prevention plan congressman Barney Frank has been floating recently. Here are some relevant parts:

The administration and Federal Reserve Chairman Ben S. Bernanke have urged banks to write down loans voluntarily, but reductions in principal remain rare. So, in late February, Frank suggested a far more aggressive role for the FHA, the government’s mortgage insurance provider.

Under his plan, the FHA would be authorized to insure about $300 billion in new loans, nearly doubling its current portfolio. The new mortgage insurance would be offered on refinanced loans in which lenders have agreed to accept 85 percent of a home’s current appraised value as payment in full. That could mean a substantial loss to the lender but probably a smaller loss than if the devalued house were sold at a foreclosure auction. It also would keep the borrower in the house with more affordable monthly payments and an equity stake in the property.

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There was an interesting opinion piece in the New York Times on the foreclosure prevention bills floating around congress. The authors thinks the current bill that made it through the senate stinks. They also thinks that counting on banks to voluntarily help consumers out is a terrible idea. Here is a good quote:

The plan for an F.H.A.-backed rescue also would rely on lenders to voluntarily reduce the loan balances to a level where the F.H.A. could take over. Volunteerism is not working. What’s needed is a stick like the bankruptcy amendment. Lenders will be more likely to modify a loan if they know the alternative is having a judge do it.

Lawmakers know what to do. They just need the political courage to confront the mortgage industry.

US politicians seem to be suddenly all in agreement that something must be done to help people avoid foreclosures. And no wonder, with so many Americans in trouble with their mortgages and upside down on their values they are looking to the government to do something to turn things around. At the heart of basically every foreclosure prevention plan is the FHA program. The most aggressive plan is coming from representative Barney Frank. Here is an excerpt from a recent article at the Christian Science Monitor:

But the most ambitious effort is unfolding in the House Committee on Financial Services, where Chairman Barney Frank (D) of Massachusetts is working up a comprehensive housing plan that aims to help 1.5 million families stay in their homes. The proposed bill, which is expected to be taken up in committee next week, gives the FHA authority to guarantee up to $300 billion in refinanced loans, if the lenders agree to reduce the outstanding principal on those loans.

“The FHA is the only agency in the federal government that can go into crisis mode and quickly help hundreds and thousands of people,” says committee spokesman Steven Adamske.

This interesting report came across the wires from the AP today. Here is an excerpt:

WASHINGTON – The Senate on Thursday passed a bipartisan package of tax breaks and other steps designed to help businesses and homeowners weather the housing crisis.

The measure passed by an impressive 84-12 vote, but even its supporters acknowledge it’s tilted too much in favor of businesses such as home builders and does little to help borrowers at risk of losing their homes.

The plan combines large tax breaks for homebuilders and a $7,000 tax credit for people who buy foreclosed properties, as well as $4 billion in grants for communities to buy and fix up abandoned homes.

The measure, titled the Foreclosure Prevention Act, will be significantly redrawn by House critics who say it favors businesses such as home builders instead of borrowers.

“Quite candidly, what we’ve done does not quite live up to the title,” said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee and the measure’s top sponsor. “We have more work to do. We do not do enough in preventing more foreclosures in the country.”

Democrats failed to win approval of ideas such as giving people threatened with losing their homes the right to seek more favorable loan terms from their lenders in bankruptcy courts. At the same time, a proposal to have the government back up refinanced loans for people facing foreclosure has yet to win GOP support.

A loan modification is the process in which a lender changes the terms of a loan. The goal of a loan modification is to help a borrower avoid foreclosure. Lenders are never anxious to make less money on a mortgage so normally the only time the agree to modify the terms of a loan is when they are forced to choose between that option and an even more expensive option for them like foreclosing on a home.

In order to seek a loan modification borrowers should contact their lender and request a modification. But because it is so difficult to obtain a loan modification some borrowers seek professional help in the process. Professional loan modification companies use their legal expertise and experience to assist borrowers in obtaining a loan modification. As with any service, it pays to shop around while investigating loan modification companies.

Good luck in your loan modification efforts.

There was an interesting article in Forbes.com recently on how FHA and private banks work together. Here is an excerpt:

Washington, D.C. –

If Congress gets its way, the Federal Housing Administration’s mission will be greatly expanded, allowing it to insure as much as $300 billion in additional mortgages to help struggling homeowners refinance.

That raises a few important questions: How good is the FHA at keeping borrowers out of foreclosure? How will it handle the heavy load of insured loans that do go bad?

Answering the first question is surprisingly tough, say housing finance experts. That’s because less than three years ago, the FHA issued new rules designed to keep homeowners out of foreclosure. It’s too soon to tell how they’ve worked.

The new rules provide for lenders to lose three times the amount of any FHA mortgage insurance benefit they claim unless they first try to work things out with borrowers in default, by, for example, modifying loan terms. The results of this new, effectively mandatory workout regimen–similar to what some in Congress are calling for now for private loans–aren’t in yet.

more…

The results of the pending presidential vote will likely have a major impact on how much the federal government is willing to assist homeowners going forward. John McCain wants the government to assist homeowners and potential buyers less than the Bush administration, and far less than the democrats want. Here is an excerpt from a recent article at SFGate.com:

Partisan politics aside, presumptive Republican nominee John McCain proposed something March 25 that no other major presidential candidate has advocated in decades: Raising minimum down-payment levels for home mortgages.

No more zero-down deals. No more “piggyback” plans that combine 90 percent first loans with 10 percent seconds. No more “down payment assistance” schemes where sellers indirectly supply all or most of the cash needed for the buyer’s down payment.

Even the 3 percent minimum required by the Federal Housing Administration would be raised under McCain’s plan. That puts him squarely at odds with the Bush administration and Democratic leaders in the House and Senate, who are negotiating reform legislation that would cut FHA’s minimum to zero – favored by the House – or 1.5 percent, favored by the Senate.

Proponents of low FHA down payments say that they are necessary to allow moderate-income families to purchase first homes and that if properly underwritten and serviced, they do not lead to extraordinarily high default or foreclosure rates.

McCain also said the giants of the mortgage industry – congressionally chartered Fannie Mae and Freddie Mac – “should never insure loans when the homeowner clearly does not have skin in the game.” He did not specify how much skin would be needed.

McCain’s rationale on tightening up down payments: He thinks a key contributing factor to the current national mortgage crisis was the tiny – or nonexistent – equity contributions required by lenders during the boom years. When the boom fizzled and home values fell, many borrowers found themselves in negative equity positions, owing more on their mortgages than the market value of their homes.

While the FHA loan limits have been increased, banks are not always thrilled about lending the higher amounts. A recent article in the WSJ online discussed this issue. Here is an excerpt:

Demand for FHA loans has jumped as other types of mortgages have become more expensive and harder to obtain.

J.P. Morgan Chase & Co.’s home-mortgage unit this week informed lenders that sell loans to the big bank that it will require “price adjustments” on the new, larger variety of FHA loans. The adjustments will add about half a percentage point to the interest rate on those loans, mortgage executives said. A spokeswoman for J.P. Morgan Chase declined to comment.

Lou Barnes, a mortgage banker at Boulder West Financial Services, Boulder, Colo., said other big lenders appear to be making price adjustments roughly in line with those announced by Chase. Mr. Barnes said he could offer a rate of about 6.375%, with no fees or “points” paid to reduce the interest, on the new “jumbo” FHA loans, compared with about 5.875% on smaller FHA loans.

Kevin W. Lynch, a mortgage broker at A. Anderson Scott Mortgage Group in Rockville, Md., said he has been quoted rates of nearly 7% on jumbo FHA loans. The loans are so expensive they “aren’t going to sell,” Mr. Lynch said. “It’s a waste of everybody’s time.”

The higher rates largely reflect muted demand from investors for securities backed by jumbo FHA loans, traders say. Those securities are expected to be less actively traded than ones backed by smaller FHA loans, and the larger loans may be apt to refinance faster, reducing the value to investors.

Meanwhile, many banks also are requiring minimum credit scores for borrowers seeking FHA loans. The FHA doesn’t set a minimum, but many lenders recently have begun requiring scores of at least 580 on the standard scale of 300 to 850.

That is shutting out some people who otherwise would qualify for an FHA loan, said Daniel H. Jacobs, chief executive of 1st Metropolitan Mortgage, a nationwide broker based in Charlotte, N.C.

At a time when Congress wants the FHA to provide more help to the mortgage market, “this is taking a major step backwards,” Mr. Jacobs said.

Here is the relevant portion from the a recent AP article on the subject:

The measure will contain a broader rewrite of the FHA that permanently raises the dollar limit on mortgages that FHA can insure to $550,000 in the most costly real estate markets. The economic stimulus bill approved by Congress in February temporarily raised the limit to from $362,790 to $729,750.

Republicans rebuffed efforts by Democrats and the White House to reduce down payments on FHA-insured loans.

The most costly element of the bill would allow home builders and other companies that are presently losing money to reclaim taxes paid up to four years ago instead of the two-year period currently permitted.

President Bush and his cabinet proposed a major overhaul of the US financial regulatory system today. See here for more details. The Democrats complained that it is not enough government intervention and that it does not address to mortgage crisis in the short run.