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.