Government Refinance Assistance

While we are waiting to learn more details from the government and from the banks about HOPE loans (aka FHA short refis), it is worth pointing out that one type of loan can currently be refinanced even when the homeowner is upside down, or in other words, even when the homeowner owes more on the home than the current value. This applies if your current loan is an FHA loan.

The program is called FHA Streamlining and here are the requirements for upside down homeowners or any other current FHA loan holder:

- You must have remained on time with your mortgage payments
- The new loan must be at a lower rate than the old loan
- You cannot take any cash out

See here at the HUD site for more info on FHA Streamlines. The beauty of an FHA to FHA Streamline loan is that there is no credit score requirement and no requirement for an appraisal. That is what makes refinancing possible even when home values in any given area have dropped dramatically.

If you owe more than your home is worth and you have an FHA loan currently contact us today and we’ll see about improving your loan terms.

No one knows for sure what this means but reports this morning are that the Bush administration agreed to the demands of the Democrats that the massive $700 billion bailout will include provisions to help homeowners prevent foreclosure (somehow…). Here is an excerpt from the AP article:

WASHINGTON - A key Democrat negotiating a $700 billion financial bailout says the Bush administration has agreed to include mortgage aid and strong congressional oversight in the plan.

Rep. Barney Frank, the Financial Services Committee chairman, says a great deal of progress has been made in talks between lawmakers and President Bush’s team on the rescue.

A government official with knowledge of the talks also said the administration has agreed to create a plan to help prevent foreclosures on mortgages it acquires as part of the bailout.

The federal government saw the writing on this week and decided that if it does not step in to help the financial sector in the US the entire economy could come to a grinding halt and plunge the US into a depression. The solution proposed centers around the government buying up something like $700 billion worth of undesirable bundled securities made up of all kinds of mortgages that may or may not ever get paid. The basic idea is that if the banks can be relieved of this burden the whole financial system will start working again. That means loans will become easier to get again which will lead to more home buyers again which will prop up housing prices again, etc. Most experts agree that dramatic action like this is needed. The idea seems to be that the dangers associated with the US falling into an economic depression more than offset the risks of this sort of bailout.

Both the Republicans and Democrats are on board with the general idea, but the Democrats are working hard to be sure the richer don’t get richer as a result of this action. Here are a few interesting quotes from a recent Bloomberg article:

U.S. Democratic lawmakers said they would act quickly on a $700 billion rescue plan for financial companies, while demanding that the legislation limit compensation for executives of companies that will benefit. …

“I know of nobody who is arguing over the amount of money or even about that the secretary ought to have the authority to purchase these toxic instruments, these bad debts,'’ said Senator Christopher Dodd, the Democratic chairman of the Banking Committee.

Still, Democrats said they would seek changes, including limiting executive compensation and offering new help to homeowners struggling to avoid foreclosure. …

“This is not a position where I like to see the taxpayer, but it is far better than the alternative,'’ Paulson said on NBC’s “Meet the Press.'’ …

Frank said it would be a “grave mistake'’ not to include a executive pay provision, while Paulson called such a measure “punitive.'’ …

As has been the norm with these recent volatile events, there are numerous details that have yet to emerge with all of this. It is possible that the new situation will help more upside down homeowners refinance into FHA short refi loans than before. Whatever the case, things are looking brighter for homeowners in trouble than they looked just a week ago. We’ll keep you posted on new developments.

There was an excellent article over at HousingWire.com on the recent congressional hearing with lenders about the Hope For Homeowners program that is set to launch in less than two weeks. While lenders are not jumping for joy over the prospect of writing off millions of dollars of debts indications are that they will use the program when it is the best remaining option. But they are still waiting on the FHA to release more details and guidelines before they can set their policies. Here is a quote from HUD commissioner Brian Montgomery in the article:

Part of servicers’ hesitance to provide details may be due to a lack of details surrounding the program specifics; it’s tough to say who will qualify when you don’t know what the standards will be. HUD commissioner Brian Montgomery, however, assured Congress that everything would be in place in time.

“First and foremost, we want to assure you that we are firmly committed to having the program up and running by October 1, 2008, and believe this goal is achievable,” Montgomery said to open his testimony on Wednesday.

The good news is that part of the delay seems to be that HUD is trying to figure out a way to get 2nd mortgages in on the act so they will not block the program entirely. Right now most 2nd mortgages stand to lose everything with a HOPE loan so they have no incentive to allow for the refinance.

HUD’s Montgomery also alluded to perhaps the program’s largest sticking point: second liens. “One of the greatest challenges to successful loan modifications is obtaining the consent of all existing lien holders, including the holders of junior mortgages,” he said. He suggested HUD was close to proposing rules under the HFH program that would have second lien holders share in the government’s interest in the property.

There are clearly some hurdles to overcome there but with any luck the folks at HUD will concoct a win-win program.

Not surprisingly, Montgomery also noted that the HOPE loans will have a higher interest rates than traditional FHA loans.

A very interesting article over at CNNmoney.com suggested that many lenders are not enthused about the new HOPE loan/FHA short refi program at all. This is in line with our predictions that HOPE loans will be seen as the very last option by banks when all other options look worse. Here are some quotes:

As part of the massive housing rescue bill passed by Congress in July, troubled borrowers will be able to refinance their home loans with the backing of the Federal Housing Authority (FHA) starting on October 1.

But at a congressional hearing today in Washington, lenders didn’t seem terribly enthusiastic about the program, dubbed Hope for Homeowners.

…

One lender’s representative, Marguerite Sheehan, Senior Vice President for JPMorganChase (JPM, Fortune 500) Home Lending, testified about the drawbacks of Hope for Homeowners.

“Under the Program, [investors in the loans] will take a loss when the principal balance is written down,” she testified, adding that they won’t have a chance to make up that loss if home prices recover. Sheehan added that Chase can make borrowers’ monthly payments affordable simply by reducing their interest rates, rather than loan principle.

She added that JPMorganChase will use the program when it is deemed to be the best option for investors and borrowers, but that investors would prefer to use alternative loan workouts that give banks and investors the chance to share in any future home price appreciation. That’s similar to the program recently announced by the FDIC for IndyMac Bank.

…

When asked whether the program would be considered a last resort by lenders, all the members of the panel, including Gross, agreed that it would be.

The good news might be that more and more banks will be looking to modify existing loans in efforts to avoid foreclosure in the next year. The value to a loan modification is that a bank still gets to collect the whole loan amount eventually rather than write down the loan by tens or hundreds of thousands of dollars.

So in the end it looks like the FHA short refi is just as we predicted — a last ditch escape hatch where banks lose less money than they would if they foreclosed and consumers get to stay at home. It is certainly better to have such an eject seat available than not, even if it won’t work for everyone.

As the fallout from the US mortgage crunch gets worse and worse (see the news today with Wall Street behemoth Lehman Brothers going under and Merrill-Lynch agreeing to fold into Bank of America) there is no question that the banking disaster is far from over. The Federal government has reached its limit when it comes to bailing banks out so expect more and more banks to fail.

What effect this will have on the mortgage industry is still unclear but the banking world will never be the same after 2008. More and more people are wisely looking into FHA-backed mortgages and that trend will likely continue until things turn around enough for irrational exuberance to take hold again. If you find yourself in a adjustable rate mortgage (ARM) and are feeling a bit nervous about it contact us about getting refinanced into a fixed rate loan. Rates are back down here is September of ‘08 so the timing is looking very good right now.

While the overall impact of the Fed stepping in to take over Fannie Mae and Freddie Mac is still to be determined, the short term impact has been that interest rates have dropped pretty significantly this week. FHA loans that used to be in the high 6’s are now in the low 6’s. People with great credit and equity can even get loan in the 5’s this week.

For most of the summer rates were hovering between 6.5% and 7% so this drop in rates is a welcome change and it is spurred by the Fed action this weekend

The results from the second quarter came in on Friday from the Mortgage Bankers Association and they were sobering. Nearly 1 in 10 mortgages were 30 days or more late. It was news like this that prompted the federal government to take of Fannie Mae and Freddie Mac over the weekend. As drastic as that measure might seem, the Fed apparently saw the writing on the wall. This title wave of defaulting mortgages is far too big for Fannie and Freddie to handle on their own. Here is a link to a recent WSJ article on the MBA report and a few quotes:

The rate of U.S. home mortgages overdue or in foreclosure rose again in the second quarter as housing markets weakened, particularly in California and Florida, and more borrowers defaulted on so-called prime loans.

Among mortgages on one- to four-family homes, 9.16% were at least a month overdue or in the foreclosure process in the second quarter, according to the latest survey by the Mortgage Bankers Association, a trade group. That is up from 6.52% a year earlier and is the highest level since the MBA began such surveys 39 years ago.

…

For prime loans, 5.35% of loans were past due or in foreclosure in the latest quarter. For subprime, the rate was about 30%.

In the latest quarter, 2.75% of all loans were in the foreclosure process, up from 1.40% a year earlier.

California and Florida account for about one in five mortgage loans outstanding, but 39% of loans that went into the foreclosure process in the quarter were in those two states.

…

Among loans insured by the Federal Housing Administration, 14.87% were overdue or in foreclosure, up from 14.73% a year earlier. The portion of FHA loans going bad is likely to increase in the quarters ahead because of a surge in new loans insured by the federal agency.

The share of new mortgages insured by the FHA leaped to 23% in July from a low of 1.8% in 2006, according to Inside Mortgage Finance, a trade publication. Guy Cecala, publisher of Inside Mortgage Finance, said the FHA’s share might reach 30% by year end.

Wow. This is a big deal. Who knows what the long term fallout will be in the mortgage business. But this is a big deal. Here is a link to the recent AP article on the subject and a few quotes:

The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend in a monumental move designed to protect the mortgage market from the failure of the two companies, which together hold or guarantee half of the nation’s mortgage debt, a person briefed on the matter said Friday night.

…

The news also followed a report Friday by the Mortgage Bankers Association that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.

…

Fannie Mae was created by the government in 1938, and was turned into a shareholder-owned company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.

A government takeover could cost taxpayers up to $25 billion, according to the Congressional Budget Office.

But the epic decision highlights the size of the threats facing the housing market and the economy. On Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. And earlier this year, the government orchestrated the takeover of investment bank Bear Stearns by JP Morgan Chase.

A HUD spokesman recently spoke and warned Americans not to expect a housing rebound any time soon. Here are some quotes from a recent Reuters article on the subject:

A recovery in the U.S. housing market from the worst slump since the Depression is unlikely until “well into 2009,'’ Housing and Urban Development Secretary Steve Preston said today.

“I think we’re right in the middle of it, and I think we have a ways to go before we start seeing a turnaround,'’ Preston said today in an interview at the agency’s Washington headquarters. “We’ll be well into 2009 before we see some real energy in this market.'’

There was an interesting article over at Forbes recently looking back at the utter failure of the FHAsecure program the Bush administration proudly unveiled around this time last year. We have posted on this failure here and here in the past .

At the time the FHAsecure plan was hailed as a way to help struggling homeowners avoid foreclosure by loosening the standards on getting into FHA loans. The problems with the program were manifold. First, the restrictions were very tight so only a small percentage of hopefuls could apply. For instance, a candidate had to already be 30+ days late on their mortgage to apply but the had to prove that they were late because an ARM reset and not because of other factors. Then the candidate had to find a bank willing to participate and most banks ended shrugging their shoulders and said “nah, no thanks” to the voluntary program. As a result only about 1% of the FHA loans over the last year had anything to do with the FHAsecure program at all.

Yet in recent press release from the White House we got this ugly bit of deception (as quoted from the Forbes article):

In a press release Friday, U.S. Housing and Urban Development Secretary Steve Preston bragged that his agency had helped more than 325,000 American families refinance into affordable mortgages since the housing crisis began.

“One year ago, the Bush Administration proactively provided an affordable safety net to homeowners who wanted to stay in their homes,” said Preston. “Today, with the expansion firmly in place, hundreds of thousands of families are in a better place thanks to FHA [Federal Housing Administration].”

Specifically, Preston cited the success of the FHASecure program intended to help borrowers who missed mortgage payments.

Will the “hope for homeowners” program be any better? It is actually law and was passed via some bi-partisan effort so there is that going for it. But we still have no word from banks on their policies concerning FHA short refinances. They have until October 1st before the program kicks in so with any luck we will see some positive developments on that front in the next 30 days.

There was an interesting AP article published recently with quick comparisons between McCain and Obama on all sorts of issues. Here is the bit on housing:

McCain: Open to helping homeowners facing foreclosure if they are “legitimate borrowers” and not speculators.

Obama: Tax credit covering 10 percent of annual mortgage-interest payments for “struggling homeowners,” scoring system for consumers to compare mortgages, a fund for mortgage-fraud victims, new penalties for mortgage fraud, aid to state and local governments stung by housing crisis, in $20 billion plan geared to “responsible homeowners.”

Not much meat there but perhaps of some interest to our readers nevertheless.

Unpleasant news just came down for FHA borrowers. For a long time the up front FHA mortgage insurance premium had been 1.5%. That meant that for anyone getting an FHA loan they had to pay 1.5% of the loan amount up front in order to offset the risk the FHA was taking to essentially co-sign on the loan. But as foreclosures rose over the last year the FHA found its reserves dwindling quickly. So in recent months the FHA launched a “risk-based” upfront mortgage insurance premium. Under that program borrowers with lower credit scores paid more of a premium up front.

The new housing legislation did away with the risk-based insurance premium plan and mandated that FHA charge the same premium to all borrowers. So in response the FHA recently announced that all FHA loans will now require a 1.75% up front insurance premium payment. See a Reuters article on that here.

How does this play out? Well on a $200,000 loan borrowers with decent credit used to have to pay a 1.5% insurance premium up front, or $3000. With the new standards that same borrower will have to pay 1.75% up front, or $3500. This premium is normally rolled into the new loan amount rather than paid out of pocket by consumers but that extra $500 is still extra debt. While this move probably helps the FHA stay solvent it is still painful for borrowers.

So far we have not seen any announcements from any banks on how they plan to handle the new FHA guideline that allows FHA to help people who owe more than their house is worth (aka are “upside down) and on the verge of foreclosure refinance into a new loans. The HOPE loan portion of the new financing law allows FHA to back loans for for people in that situation for up to 90% of the appraised value of the home. There is some real skepticism in the industry about the program because it is voluntary of the part of banks but only time will tell on this one.

We will update you as soon as banks start announcing their policies on the issue. The new law goes into effect on October 1, 2008 but there is no telling when banks will be ready to do anything about it.

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

“Seller down payment assistance has helped more than one million Americans who are able to afford a monthly payment but do not have the down payment needed to become homeowners,” Green said. “While the mortgage rescue package contains numerous provisions to aid hardworking American homeowners, it is regrettable that charitable down payment assistance funded by sellers was omitted from this otherwise comprehensive package.”

…

Green’s bill will reinstate FHA seller down payment assistance for persons with certain credit scores by establishing three classes of eligible barrowers:

• Those with FICO scores above 679 will be allowed FHA seller down payments under current HUD guidelines

• Those with FICO scores of 620 through 679 will pay a risk-based mortgage insurance premium to cover their possible defaults in the amount of 3.0 percent of the original principal for a single premium and 1.25 percent of the principal balance as an annual premium

• Those with FICO scores of less than 620 who may be deemed as eligible by HUD for FHA seller down payments will be subject to HUD-established risk-based pricing.