About Government Refinance and Home Purchase Programs

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.