Hope For Homeowners - New Program
HOPE FOR HOMEOWNERS Program
The Housing and Economic Recovery Act of 2008 (HERA) creates the Hope for Homeowners (HFH) Program. HFH is a new FHA refinance program designed to help distressed borrowers keep their homes with a new, more-affordable mortgage. HFH adds a new section to the National Housing Act (Section 257) and provides $300 billion of insurance authority (approximately 1.5 million mortgages.)
Below is our review of the key elements of the Hope for Homeowners legislation. Also included is a comparison of HFH w/ FHASecure. HUD has indicated HFH will be implemented on October 1st.
I. Overview - Hope For Homeowners (HFH) Program
At its core, HFH is an FHA program that will follow FHA program (Section 203 (b)), processing and lender eligibility rules except as modified by the legislation. The cornerstone of the program is that the holder/servicer accepts a write down to 90% of the current appraised value (plus an additional 3% percent reduction for the upfront MIP) in return for FHA insurance on a new refinance loan involving borrowers unable to make their payments at the current interest rate and loan balance.
The fundamental questions are: 1) What circumstances would make HFH a more desirable option versus current loss mitigation tools (loan modification or repayment plans) or FHASecure and 2) Is there a role for other lenders not involved in the existing mortgage w/ the borrower.
Key Features
Ø Participation by the holder/lender and the homeowner is voluntary.
Ø New mortgage cannot exceed 90% of current appraised value
o 3% upfront MIP to be paid from loan proceeds
Ø Eligible borrowers must have reasonable ability to make mortgage payments using underwriting criteria established by the Board (Secretaries of HUD and Treasury, Chairman, Federal Reserve Board and Chairman of the Federal Deposit Insurance Corporation).
Ø New subordinate liens are not permitted (i.e. lender may not take back a second from the borrower to recover any write down).
o HFH states “All holders of outstanding mortgage liens on the property to which the eligible mortgage relates shall agree to accept proceeds of the insured loan as payment in full of all indebtedness under the eligible mortgage, and all encumbrances related to such eligible mortgage shall be removed.”
Ø Holder/lender does not share in any appreciation/equity in the property.
o There is a provision for sharing of HUD’s portion of any appreciation w/ subordinate lien holders
In return for the write down, the Board will permit the lender to use more flexible underwriting criteria (to be determined) in evaluating the borrower’s ability to repay the new loan. Under HFH, the lender may not recover any portion of the write down through subordinate financing.
Example:
Existing indebtedness: $200,000
Current Value: $180,000
Max loan amount: $162,000
“Net” Proceeds: $157,140
(3% Upfront MIP)
Write down: $42,860
II. Eligibility Requirements
While the Board and HUD will have the discretion to develop additional program criteria, the Bill provides a framework for program eligibility:
Program Basics
Ø Participation by the lender and the homeowner is voluntary.
Ø Mortgages to be eligible must have been originated on or before January 1st, 2008.
Ø Maximum loan amount is $550,440 (132% of $417,000).
Ø MIP is 3% upfront; 1.5% annual.
Ø HFH expires on September 30, 2011 (commitments made).
Ø HFH loans will be placed in special fund, not MMI Fund – FHA’s fund for Section 203 loans.
Ø HFH loans are eligible for securitization in Ginnie Mae pools.
Ø Board sets policy, HUD/FHA implements policy.
Borrower Eligibility
Ø Borrower (as of March 1, 2008) has total housing expense ratio greater than 31% and possibly higher at the Board’s discretion.
Ø Borrower certifies they have not defaulted “intentionally” and has provided accurate income/expense information.
Ø Borrower must have reasonable ability to make mortgage payments using criteria established by the Board.
Ø Principal residence only: “such residence is only residence in which mortgagor has any present ownership interest”.
Ø Borrower can obtain subordinate financing during first 5 years of mortgage only if the Board permits. Any lien must be for maintenance of property standards.
Ø Lender must document borrower’s income via two most recent tax returns.
Ø Lender must do criminal background check on borrower (no mortgage-related fraud last 10 yrs).
Mortgage
Ø New mortgage cannot exceed 90% of current appraised value
o 3% upfront MIP paid from loan proceeds
Ø Appraisal will be completed in accordance w/ FHA guidelines
o Appraisal independence – no improper influence
o Civil money fines for any violations
Ø Any late fees and/or prepayment penalties must be waived
Ø All existing mortgages must be released
Ø New mortgage must be fixed rate with term of 30 yrs or more
Buyback Risk
Ø FHA insurance will not be paid if first payment default
Ø Board will establish other standards to enforce compliance w/ all appraisal and underwriting criteria
o Underwriter must provide reps and warranties
o Penalty for violation ---no insurance benefits
Equity/Appreciation Sharing
Ø HFH establishes recapture standards for both equity (the initial 10%) and any future property appreciation if property refinanced or sold.
o Equity is shared in a sliding scale formula w/ HUD keeping 100% if home is sold or refinanced in first year. Over next five years, HUD’s share declines 10% each year and levels off at 50% for the life of the loan.
o Any appreciation in the home is shared 50/50 between HUD and the homeowner.
§ Board shall establish standards for payment to existing subordinate lien holders of a portion of HUD’s share of any future appreciation.
Other Features
Ø Servicers using HFH will be considered to have acted in best interests of investor if certain conditions are met (e.g. loan is in default or likely to occur).
Ø Funding: Treasury shall issue HOPE Bonds to pay “net” costs.
o Funds from GSE housing trust fund will also be used to reimburse Treasury
Ø Board shall establish a “reasonable limitation on origination fees and interest rates.
Ø Board shall conduct study on need for bulk refinancing mechanism.
Ø HUD is required to market the program to homeowners, lenders and the general public.
III. Comparison: Hope for Homeowners (HFH) and FHASecure Programs
Ø HFH is, in effect, the legislative version of FHASecure which was also designed to assist delinquent conventional borrowers.
o FHASecure has only assisted about 3,000 delinquent borrowers according to HUD data. Over 95% of FHASecure loans involve the refinance of current conventional loans.
o Congress created Hope for Homeowners to assist more delinquent borrowers.
Ø HFH is available for borrowers with any mortgage product.
o FHASecure limits product availability (e.g. option ARM and I/O delinquent borrowers must have been current for six months prior to reset).
Ø HFH is expected to have more liberal underwriting criteria.
o FHASecure – “FHA has not changed its underwriting guidelines but rather its eligibility criteria” (Mortgagee Letter 2008-13 dated May 7th).
Ø HFH limits the maximum loan-to-value (LTV) ratio to 90%.
o HFH requires 3% upfront premium to be paid from proceeds.
o FHASecure uses sliding scale for maximum LTV depending on borrower’s credit.
Ø HFH does not permit the lender to execute a subordinate lien to recover any write downs.
o FHASecure does permit second liens with either immediate repayment (considered in underwriting or deferred repayment (“soft second”).
Ø HFH loans will be placed in a special insurance fund.
o HOPE Bonds will be issued to provide any subsidy amounts necessary for HFH program.
o FHASecure loans are placed in Mutual Mortgage Insurance Fund which must be actuarially sound.
o This difference in funding enables HFH to reach higher risk borrowers.
Ø HFH expires on September 30, 2011.
o FHASecure expires on December 31, 2008 though it could be extended.