U.S. Tries New Tack on Housing

Department of Housing and Urban Development makes changes to Hope for Homeowners plan aimed at increasing participation.

NEW YORK (CNNMoney.com) -- The Bush administration said Wednesday that it was changing its nearly-moribund mortgage rescue plan in an effort to spark more lenders and homeowners to participate.

The Department of Housing and Urban Development's Hope for Homeowners mortgage rescue plan, which Congress toiled over for months before passing legislation last summer, took effect Oct. 1.

The program aimed to help hundreds of thousands of homeowners by putting up government insurance behind cheaper, refinanced mortgages, for people at risk of foreclosure.

But since then, few troubled mortgage loans have been modified under the plan. Now, in an effort to kick start it, HUD is trying to open up the program to more homeowners.

"Clearly, meaningful changes were needed," said HUD Secretary Steve Preston. "These modifications should increase lender participation and help more families who are having difficulty paying their existing mortgages, but can afford a new affordable loan insured by HUD's Federal Housing Administration."

Smaller writedowns: In the biggest change, lenders that participate in Hope for Homeowners won't have to write down loans as much as they did under the original rules for the program. The new guidelines allow them to reduce mortgage principal to 96.5% of a home's current market value - instead of 90%.

The new ratio guideline only applies to those whose new loan payments would not exceed 31% of their gross incomes. The writedown will remain 90% for borrowers who are paying a larger percentage of their income toward their mortgage debts.

"This balances competing aims of encouraging more borrowers to enter the program while controlling for potential losses due to redefaults," Tom Deutsch deputy executive director of the American Securitization Forum, a group that represents the interests of investors in mortgage backed securities.

The smaller writedowns make it cheaper for lenders to participate in this strictly voluntary program.

The second change involves second lien holders, such as home equity lenders, of homeowners seeking to refinance into HUD loans.

Payments to lien holders: Under the changes announced Wednesday, HUD will make up-front payments to get second lien holders to relinquish their rights to future payments.

Second lien holders often slow the mortgage modification process because they have nothing to gain from agreeing to refinancings, known as workouts. The values of the collateral - the homes - are almost always less than the amounts borrowers owe to the primary lenders.

The amount of payments to second lien holders will be negotiated on a case-by-case basis, according Deutsch. The more a loan is underwater - meaning a borrower owes more than a home is worth - the lower the value of the second lien and the less HUD will likely pay for releases.

Deutsch said he expects the payments to range between 5% of second lien in cases of the most severely underwater loans to as much as 30% for mortgages that are not as far gone as that.
HUD did not immediately respond to a request for comment.

40-year mortgages: Lenders will be able to extend the terms of loans to 40 from 30 years. Extending the number of months borrowers have to repay their mortgages reduces monthly obligations. Sometimes that can make the difference between affordable and unaffordable loans.

No more test runs: In addition, the original legislation mandated a three payment trial term, during which borrowers had to pay faithfully before the modification became permanent. The new guidelines eliminate that requirement.

One of the original bill's chief authors, Rep. Barney Frank, D-Mass., applauded the program changes by HUD.

"These are very helpful steps and reflect a commitment to meeting the need for more aggressive action to diminish foreclosures," Frank said.

HOPE for Homeowners Program Information

WASHINGTON - The Bush Administration today unveiled additional mortgage assistance for homeowners at risk of foreclosure. The HOPE for Homeowners program will refinance mortgages for borrowers who are having difficulty making their payments, but can afford a new loan insured by HUD's Federal Housing Administration (FHA).

"For families struggling to keep up with their mortgage payments, this program will be another resource to refinance into a loan they can afford," said HUD Secretary Steve Preston. "FHA remains a safe and affordable alternative to the high-priced mortgage loans that threaten homeowners' ability to retain their homes. We strongly encourage borrowers to work with their lenders to determine if HOPE for Homeowners is the right program for them."

The HOPE for Homeowners program was authorized by the Economic and Housing Recovery Act of 2008. Since the President signed this vital legislation into law on July 30, 2008, the HOPE for Homeowners Board of Directors has worked diligently to develop and implement the program as directed by Congress. The Board was charged with establishing underwriting standards to ensure borrowers, after any write-down in principal, have a reasonable ability to repay their new FHA-insured mortgage.

The HOPE for Homeowners program begins today and ends September 30, 2011. The program is available only to owner occupants and will offer 30-year fixed rate mortgages - so the borrower's last payment will be the same as the first payment. In many cases, to avoid what would be an even costlier foreclosure, banks will have to write down the existing mortgage to 90 percent of the new appraised value of the home.

Borrower Eligibility
Borrowers are encouraged to contact their lender to determine eligibility, but may be eligible if, among other factors:

• The home is their primary residence, and they have no ownership interest in any other residential property, such as second homes.
• Their existing mortgage was originated on or before January 1, 2008, and they have made at least six payments.
• They are not able to pay their existing mortgage without help.
• As of March 2008, their total monthly mortgage payments due were more than 31 percent of their gross monthly income.
• They certify they have not been convicted of fraud in the past 10 years, intentionally defaulted on debts, and did not knowingly or willingly provide material false information to obtain their existing mortgage(s).

How the HOPE for Homeowners program works
"HOPE for Homeowners will add to HUD's existing efforts to make FHA refinancing available to homeowners who need it most," said FHA Commissioner Brian D. Montgomery. "One year ago, FHA expanded refinancing into its FHASecure program. Since that time, we have helped more than 360,000 families keep their homes by refinancing with FHA, and we will assist a total of 500,000 families by the end of this year."

The Board expects that the primary way homeowners will participate in the program is by working with their current lender. HOPE for Homeowners will serve as another loss mitigation tool available to distressed borrowers.

HOPE for Homeowners also includes the following provisions:

• The loan amount may not exceed a maximum of $550,440.
• The new mortgage will be no more than 90 percent of the new appraised value including any financed Upfront Mortgage Insurance Premium.
• The Upfront Mortgage Insurance Premium is 3 percent and the Annual Mortgage Insurance Premium is 1.5 percent.
• The holders of existing mortgage liens must waive all prepayment penalties and late payment fees.
• The existing first mortgage must accept the proceeds of the HOPE for Homeowners loan as full settlement of all outstanding indebtedness.
• Existing subordinate lenders must release their outstanding mortgage liens.
• Standard FHA policy regarding closing costs applies, and they may be:
  Financed into the new loan provided the value of the mortgage (including the Upfront Mortgage Insurance Premium) does not exceed 90 percent of the new appraised value of the home.
  Paid from the borrowers' own assets.
  Paid by the servicing lender or third party (e.g., federal, state, or local program).
  Paid by the originating lender through premium pricing.
• The borrower must agree to share with FHA both the equity created at the beginning of this new mortgage and any future appreciation in the value of the home.
• The borrower cannot take out a second mortgage for the first five years of the loan, except under certain circumstances for emergency repairs.

The lender will disclose to the homeowner the benefits of the program including home retention, a new affordable mortgage based on the current appraised value, and 10 percent equity. The lender will also explain the prohibition against new junior liens against the property unless directly related to property maintenance, and a minimum of 50 percent equity and appreciation sharing with the Federal government.

The costs to the homeowner include the upfront and annual insurance premiums, as well as a share of the equity created by the write-down associated with the HOPE for Homeowners mortgage and any future appreciation in the value of the home. At settlement, subordinate lien holders will receive a certificate that evidences their interest as an obligation backed by HUD, with payment conditional on the value of HUD's appreciation share.

If the home is sold or refinanced, the homeowner will share the equity with FHA on a sliding scale ranging from a 100 percent FHA share after the first year to a minimum of 50 percent after five years. The lien holder that previously held the highest priority will receive payment up to a proportion of its original interest, not to exceed the amount of available appreciation. This type of delayed payoff will take place until all prior lien holders are satisfied or the amount of available appreciation is exhausted. All remaining appreciation is remitted to FHA.

The HOPE for Homeowners Board of Directors includes HUD Secretary Steve Preston, Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke, and FDIC Chairman Sheila Bair. They have named the following people to serve on the board as their designees: FHA Commissioner and Chairman of the Board Brian Montgomery, Federal Reserve Board Governor Elizabeth Duke, Treasury Assistant Secretary for Economic Policy Phillip Swagel, and Federal Deposit Insurance Corporation Director Tom Curry.

Read more about HOPE for Homeowners at www.hud.gov/hopeforhomeowners.