Hope for Homeowners Act of 2008

The "HOPE for Homeowners Act of 2008" creates a new program within FHA to back FHA-insured mortgages to distressed borrowers.  The new mortgages offered by FHA-approved lenders will refinance abusive loans at a significant discount for homeowners facing difficulty meeting their mortgage payments. 

The program is built on five principles:

• 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.       GOOD!

• 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.     VERY GOOD!

• No windfall for borrowers.  Borrowers will share their new equity and future appreciation equally with FHA.  Borrowers will pay for the FHA insurance.        VERY GOOD!

• Voluntary Participation.  This will be a voluntary program.  No servicers will be compelled to participate.        This Part Concerns us! 

• 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 create certainty and get markets flowing again. This is Assumptive!

Program Administration. The new program will be overseen by a Board made up of the Secretary of HUD, the Secretary of the Treasury, 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. A step in the right direction!

Eligible Borrowers. Only owner-occupants will be eligible for the new FHA-insured mortgage.  No investors or investor properties will qualify.  The Board will establish other eligibility criteria, including criteria designed to determine whether borrowers can afford their existing loans. OK!   We do question this in regards to the initial ideology that included principal reduction. This could certainly effect the determination as to the borrowers capability. Principal reduction and recasting allows for two relief valves, continued repayment or abilty to sell in a depreciating atmosphere.

New Loan Amount.  The size of the new FHA-insured loan will be determined by:

• The lesser of the amount the borrower can afford to repay, as determined by the current affordability requirements of FHA, taking into account the amount of income available to the family after basic expenses are paid (residual income); or,

• The amount of the existing loan minus a discount established through an auction process established by the Board.  The auction process will allow for bulk refinances, at a discount, of eligible loans.  The federal government will not take possession of the mortgages.

• The Board will have flexibility to change the affordability standards to suit circumstances.

• In either case, FHA will not insure more than 90% of the current value of the home.  Loans must be 30-year, fixed rate loans.   

                    Not Clear!

Equity 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. Sensible in it intent.....The process of determination is questionable.

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. HMMM!

Qualified Safe Harbor. The legislation provides servicers with an incentive to participate in the program by offering a safe harbor against legal liability. OK!

Funding.  The Act provides for $20 billion in credit subsidy, which is expected to insure new, affordable loans that refinance approximately $400 billion in troubled mortgages. Interesting....needs more definition and research to comment!

Program Sunset.  The program sunsets at the end of 2012.  Any remaining funds, and future collections resulting from appreciation of FHA-insured mortgages made under this program, will be returned to the government.

New Foreclosure Prevention Affordable Housing Goal for Fannie Mae and Freddie Mac. In addition to the FHA option, the legislation requires the Secretary of HUD, together with the Secretary of the Treasury and the Director of OFHEO, to establish a new Foreclosure Prevention goal for Fannie Mae and Freddie Mac.  The two enterprises would be required to purchase eligible loans at a discount, and write down those mortgages to help the families keep their homes.  Mortgages would have to be written down according to the same criteria as loans eligible for FHA insurance under this legislation - based on ability to pay, taking residual income into account.  OFHEO would be given the authority to require the enterprises to raise additional capital commensurate with the additional risk this new goal may pose. Write down principal or interest?