On July 30, 2008, President Bush signed the Housing and Economic Recovery Act of 2008 (the Act) into law.The Act is intended to address several aspects of the subprime lending fallout and is headlined by its bailout of the quasi-private mortgage institutions known as Fannie Mae and Freddie Mac.Influenced as well by a continued nationwide rise in foreclosure rates up an estimated 121% for the second quarter of 2008 against the same quarter last year the Act also contains measures aimed to reign in foreclosures.The bulk of those efforts are embodied in, and this article is focused on, the HOPE for Homeowners Act of 2008 (the HOPE Act), named for the Home Ownership Preservation Entity (HOPE) Fund established for the FHA insurance obligations incurred under the HOPE for Homeowners Program (the HOPE Program).
The HOPE Program provides refinancing to homeowners on the brink of foreclosure in the form of Federal Housing Administration (FHA) insured refinance loans.The $300 billion allocated to the HOPE Fund is estimated in the Congressional analysis to assist approximately 400,000 homeowners from its October 1, 2008, commencement thru its September 30, 2011 sunset.This program is not without its strings, however, and convincing an existing current mortgage lender to accept a partial payoff is only one hurdle.
To be eligible for a refinance loan under the HOPE Program, a potential borrower must satisfy several requirements.For starters, the potential borrower must show that the subject property is their primary residence and that it is the only residence in which they have a current ownership interest.This has the effect of excluding homeowners who are still under the shadow of investment homes.The potential borrower must also certify that they have not intentionally defaulted on their mortgage loan and show that they cannot sustain their current mortgage, which for purposes of the HOPE Program is presumed to be the case where the ratio of mortgage debt to income is greater than 31%.Interestingly, the HOPE Act refers to all existing mortgages of such potential borrower in determining this ratio.While that presumably is intended to include subordinate mortgages on the subject property, the language of the HOPE Act is not clear as to whether mortgage debt related to other properties, such as commercial property, would be included.The HOPE Act is also unclear regarding whether the measure of income is gross or net of taxes or other obligations.
The refinance loan itself will be made by an FHA-approved lender and must be a 30-year fixed interest obligation with a principal amount equal to the lesser of 90% of current appraised value or some other figure which the FHA determines the borrower can afford; provided, however, that such loan cannot exceed $550,440.00.With limited exception, the HOPE Act contains a five year prohibition on second mortgages, such as home equity loans.The appraisal must be based on the current value of the property and be performed in accordance with FHA standards by an appraiser with state or national certification and a certain minimum educational background.Furthermore, the HOPE Act provides for fines against parties who attempt to influence the appraiser.In other efforts to minimize the incentive to make marginal loans, the FHA will not pay on insured loans where the borrowers representations are false or where the first payment on the HOPE loan is missed.
So as not to provide a government-sponsored windfall to borrowers under the HOPE Program, certain costs are allocated to the borrower.Significantly, an initial 3% premium is diverted from the amount otherwise payable to the lender whose mortgage is to be paid off under the HOPE Program.Thus, this amount is essentially paid by that lender.However, the borrower will be responsible for an additional 1.5% premium based on the outstanding HOPE loan balance at that time.The annual premium is ongoing for the life of the loan.Interestingly, the FHA does not release the equity a borrower gains from the program, which would presumably be the 10% or greater difference between the HOPE loan amount and the appraised value.Instead, upon sale of the property or refinance of the HOPE loan the FHA is entitled to receive a percentage of the realized equity, ranging from 100% within a year of the loan to 50% after five years.Furthermore, on such disposition the FHA also will be entitled to 50% of any appreciation in value measured from the appraised value obtained in conjunction with the HOPE loan.Of course, borrowers also should remain aware that debt forgiveness on the prior mortgage loan may be taxable, subject to the exception provided by the Mortgage Forgiveness Debt Relief Act of 2007 for debt forgiveness in the years 2008 and 2009.
Finally, there are practical considerations affecting the willingness of existing lenders to accede to a borrowers participation in the HOPE Program.Obviously, the lender must be willing to accept a payoff that will not be greater than 90% of the current appraised value of the property in full satisfaction of its loan, as well as any default, delinquency, and prepayment penalties and fees, and not including the offset for the 3% FHA premium.Furthermore, any subordinate liens must be extinguished. Acknowledging that there is not likely to be enough proceeds to reasonably satisfy a subordinate lender, the HOPE Act contemplates the establishment of standards for facilitating coordination among lenders, and authorizes payment to a subordinate lender a portion of the future appreciation which FHA captures upon later sale or refinance.The ability to extinguish a subordinate lien is likely to be a key practical difficulty for potential borrowers under the HOPE Program.
The HOPE Act creates a program designed to spare some homeowners from imminent foreclosure.On the other hand, potential borrowers need to tread cautiously as the HOPE loan is bundled with particular and ongoing conditons and restrictions, far more than have been publicized in the mainstream press.Moreover, the program will likely evolve further under future FHA and HUD regulatory interpretation and implementation.Similarly, closing agents must pay particular attention when coordinating future loan pay offs to ensure that the FHA, as well as past subordinate lenders, are directed the equity and appreciation funds which they are due on the pay off of a HOPE loan.On its face, the HOPE Program has been crafted to provide relief to persons in danger of losing their homes, but not for persons in that position due to a portfolio of bad real estate investments.For those whose individual circumstances are conducive to a HOPE loan and whose lenders are willing to accept a reduced payoff, this program will certainly provide welcomed short term relief.However, the long term legacy of that help may present its own frustrations to borrowers and will be of no real assistance at all to persons whose overall financial problems ultimately arose from bad real estate investments.