There’s “HOPE” for those to refinance at market value! Think of it as a short-refinance

The Housing and Economic Recovery Act of 2008 which is expected to be signed by President Bush today has a tremendously advantageous program within it called the “HOPE for Homeowners Act of 2008." This has the potential to help the many, many homeowners who have lost considerable equity in their homes and who want to refinance. Essentially, participating lenders will forgive the amount of the loan above market value for your home and refinance into a new government-backed loan. This will take some time to shake out (probably well past October), but could be of great assistance to families and stabilizing the housing market. The summary of the HOPE program is below.


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 the loans of distressed owner-occupants at risk
of losing their homes to foreclosure at significant discounts. 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.
Program Oversight. The new program will be overseen by a Board made up of the
Secretary of HUD, the Secretary of the Treasury, the Chairman of the Federal Reserve Board,
and the Chairman of the Federal Deposit Insurance Corporation (FDIC). The Board will have
the authority to develop standards within the framework of the legislation.
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 the lesser of the
amount the borrower can afford to repay, as determined by the current affordability requirements
of FHA, or 90 percent 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.