Government Refinance Assistance

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.

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.

As expected, the housing bill passed the House with ease today with a 272-152 vote. The final hurdle is to pass the Senate in its revised form and then get past the President. But getting past the President should be no hurdle at all at this point because he indicated that he will not veto the bill in present form. The new legislation could be signed into law as soon as Friday barring any delays. Here is a link to an AP article on the subject. Here is an excerpt as well:

Rescue legislation sailed through the House on Wednesday aimed at helping 400,000 strapped homeowners avoid foreclosure and preventing the collapse of troubled mortgage companies Fannie Mae and Freddie Mac.

The 272-152 vote reflected a congressional push to send election-year help to struggling borrowers and to reassure jittery financial markets about the health of two pillars of the mortgage market.

Hours before the vote, President Bush dropped his opposition to the measure, which now is on track to pass the Senate and become law within days.

President Bush is no longer threatening to veto the housing bill coming his way. That means the new bill is all but guaranteed to become law very quickly — perhaps even as soon as this week. See recent AP story on it here. Here is a quote:

President Bush dropped his opposition Wednesday to a broad housing package aimed at bolstering the sagging economy, despite his objections to including $3.9 billion for neighborhoods hit hardest by foreclosures. The House was expected to vote on the bill Wednesday, and it could become law as early as this week.

It looks like the housing bill is moving ahead as planned and cold be signed into law in just a matter of weeks. We get this quote from a recent article over at TheHill.com:

House Financial Services Committee Chairman Barney Frank (D-Mass.) on Tuesday announced a deal on a housing rescue package that he predicted the president would sign, despite the inclusion of $4 billion in block grants that the White House has called a deal-breaker.

After days of negotiations with administration officials and Senate Banking Committee Chairman Chris Dodd (D-Conn.), Frank sent the legislation to the Rules Committee, paving the way for a Wednesday vote on the bill.

“No one agrees with everything in the bill, but I don’t think that there’s anything in this bill that makes the people who are for most of it gag,” Frank told reporters

The days of no money down FHA home purchase loans appear to be numbered. Currently a home buyer can get an FHA loan that covers 97% of a home purchase price and then get a seller-paid 3% grant via non-profit companies like Ameridream. That grant program is about to get the kabosh as one of the compromises required to pass the new housing bill. Here is an article on it. If you know anyone who is looking to purchase a home and would like to do so with no money down have them contact us right away. Coming very soon they will need to bring at least 3% out of pocket for home purchases.

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.

Here is the link to an interesting editorial on the mortgage mess the U.S. is facing. The best quote is near the end of the piece:

The enduring interest of the housing slide/recession/depression/ apocalypse of 2008 will lie not only in the brute details of what happened, but in the chain of incentives that made events possible. That chains extends upward from bad-faith “buyers” following a distorted gospel of personal saving, to mortgage salesmen seeking to boost commissions and bonuses, to their bosses who couldn’t devise new market share-grabbing mortgage products fast enough, to Fannie and Freddie and private institutions who unwisely “pooled” mutually dependent risks and marketed the pools as extra-safe, all the way up to careless international buyers and the compromised rating agencies they depended upon.

What a pithy quote. “Socializing risk and privatizing reward” is what Senator Chris Dodd called recent government actions of letting private bankers and Wall Street wonks get rich on the housing market during boom times and then rushing in to bail them out when times get tough. Something surely will change out of this latest mess. With any luck regular Americans won’t get stiffed even more than they already have been. Anyway, here is the recent Time article that provided that Dodd quote.

The problems with Fannie Mae and Freddie Mac are further complicating issues with the pending housing bill. Here is an excerpt from a recent AP article on the subject:

The push to shore up Fannie Mae and Freddie Mac is adding momentum to the housing package, which creates a new regulator and tighter controls over the companies and creates a new affordable housing fund financed by their profits.

The bill creates a $300 billion program at the Federal Housing Administration to let strapped homeowners who can’t afford their monthly payments — many of them trapped in subprime loans and owing more than their homes are worth — refinance into cheaper, fixed rate mortgages instead of losing their homes.

In something of an ironic twist, Senate Republicans who initially complained the FHA program would be a taxpayer-financed bailout backed it after Democrats agreed to cover any losses by diverting the affordable housing fund. Now lawmakers are contemplating bailing out the rescuers.

The plots twists are adding up on this saga…

With quasi-government mega-lenders Fannie Mae and Freddie Mac reeling congress in now seriously considering amending the housing bill to help prop them up in addition to the FHA and other provision already in the bill. We get this from a recent WSJ article on the subject:

Supporters of the overall housing package, which includes a program to refinance mortgages headed for foreclosure and tax relief for homeowners, said they hoped it, too, would pick up momentum if it is combined with the administration’s rescue plan for Fannie and Freddie. It may reduce the chances President George w. Bush would veto the bill over some of the provisions administration officials dislike. And it may help to smooth negotiations over the differences between House and Senate-passed versions.

“It would seem to me you could marry the two and move them quicker,” said Sen. Johnny Isakson (R., Ga.), of combining the housing bill with the new proposal to aid Fannie and Freddie. “It puts something the White House wants done with a bill that the White House has expressed a few second thoughts about.”

The number thrown around is 400,000. That is the number of homeowners legislators hope the new housing bill will help avoid foreclosure on their homes. That is a pretty big number. But if more than 4 million homes are facing foreclosure as some forecasters predict in the next 18 months that 400,000 doesn’t sound so impressive anymore. We have written an editorial speculating on what it will take to be considered for the new “short refi” option that will become available via the FHA program. There was another editorial piece in the Wall Street Journal recently expressing further skepticism about the effectiveness of the new legislation. Here is an excerpt:

Lawmakers can say they’ve “done something” about the crisis. The only problem is the bill won’t work. Contractual and incentive problems in securitized mortgages will defeat the legislation’s attempt to provide a significant amount of relief.

First, the bill requires lenders to write down the principal on loans by as much as 15%, and waive prepayment fees before their loans are eligible for FHA-guaranteed refinancing. …

For securitized loans, there is no “lender” who can write down the principal. Instead, management of the loan is contracted out to a servicer. Frequently, servicers are contractually forbidden from modifying loans or else significantly restricted in their ability to do so. This alone will prevent many mortgages from being eligible for FHA refinancing.

Even when servicers can modify loans, they have no incentive to do so for the FHA program. Servicers incur significant costs (up to $1,600) in modifying a loan. Moreover, servicers’ income is mainly based on the amount of principal outstanding in a securitization trust. When a loan leaves the pool because of a refinancing, the servicer ceases to receive revenue from it. Any equity appreciation in the property would be shared by the mortgage holder and the FHA, but not the servicer. In short, servicers have nothing to gain and everything to lose by engaging in the write-downs necessary for the FHA bill to work.

Another obstacle: Many homeowners have second mortgages, and many of these second mortgages are completely “underwater” — or out of money. The second mortgages are frequently held by different entities than the first mortgages. In order for the refinanced mortgage to be insured by FHA, the second mortgage holder would have to be bought out.

Let’s hope that this author is overly pessimistic or misinformed. I know that short sales are being done in large numbers by banks right now all across the country. I see no reason why a short refi couldn’t be an alternative to a short sale. However, we will have to wait and see in a few months to what degree the new rules are a hit or a miss.

With an overwhelming vote of 63-8 the Senate version of the housing bill passed on Friday. Here is a blurb from MarketWatch:

WASHINGTON (MarketWatch) — The Senate approved a massive housing relief bill on Friday on a 63-5 vote. The bill would overhaul the supervision of Fannie Mae, bolster the Federal Housing Administration with $300 billion in additional loan assurances, and attempt to prevent foreclosures. The legislation will now make its way back to the House, where significant changes are possible before final passage. President Bush has threatened to veto the bill because one provision would give money to local governments to buy foreclosed homes.

What’s next? Well as far a we can tell this:

1. The House and Senate need to hammer out a compromise on their two similar bills
2. They need to convince President Bush not to veto it
3. Once the President signs the bill we have to wait for banks figure out what they are going to do about it (which will likely take a few months)

Lots ahead of us still to be sure.

GovernmentRefinanceAssistance.com is back online again after a major server crash. Thankfully most of our data was recovered. With any luck we won’t have that problem again soon.

There was an interesting synopsis of the general plans being put forth by presidential nominees Obama and McCain in the AP recently. Here is a snippet of that:

McCain:

_ To be eligible for the FHA-insured mortgages, certain borrowers who live in their homes must prove creditworthiness at the time of the original loan and that they can meet the terms of a new 30-year fixed-rate mortgage.

Obama:

_To be eligible for FHA help, people do not have to have good credit to qualify as long as they can show they are able to afford the new payments.

_Separately, Obama would create a 10 percent mortgage credit for people who do not itemize their taxes.

_Supports changing bankruptcy laws so that homeowners going through that process can renegotiate terms of their mortgages — just as people or investors who own multiple homes or vacation homes can do.

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.