- The Washington Times - Friday, August 8, 2008

I have to chime in on the recent Hope for Homeowners legislation. The recently passed bill calls for $300 billion in funds to bail out a predicted 400,000 homeowners on the edge of losing their homes to foreclosure. Here’s a quick and dirty summary of the legislation.

  • The Federal Housing Administration (FHA) will guarantee refinanced loans for eligible homeowners.
  • Lenders currently holding mortgages in default must agree to substantial write-downs. The new FHA loans cannot exceed 90 percent of the home’s existing value.
  • A 3 percent insurance fee is wrapped into the loan amount to cover the costs of new defaults.
  • Existing lenders must work out any second trust issues. Second trusts are not allowed under the new program.
  • The borrower must demonstrate a “lack of capacity” to pay the existing mortgage.
  • The borrower must have enough verified income to afford the payments on the new mortgage.
  • The borrower must occupy the residence.
  • The program is designed to prevent borrowers from intentionally defaulting on the mortgage to reduce the loan balance. They must certify their disclosed financial status is true.
  • If the borrower sells the property within a year, FHA retains the 10 percent equity.
  • If the property appreciates in value and is sold within four years, FHA retains up to 50 percent of the equity gained through the appreciation.
  • OK folks, I don’t think this thing is going to work. There are just too many details that, I believe, won’t be worked out to close 400,000 loans. Let’s do a little dissecting.

    First, FHA must persuade the existing len ders to take substantial losses. In theory, this makes plenty of sense. A lender may have an outstanding loan in the amount of $200,000 secured against a property that once was valued at $206,000. The property value subsequently drops to $190,000, and the borrower is defaulting on the mortgage. Instead of going through the time and cost of foreclosing on a property worth significantly less than the mortgage balance, the lender agrees to take a big loss to get out of the deal.

    Under the Hope for Homeowners program, the borrower would refinance to a new loan equal to 90 percent of the home’s existing value. In this case, the new loan amount would be $171,000. FHA would then back out the 3 percent insurance fee of $5,130 and the existing lender would receive $165,870 of its original $200,000 loan balance.

    Will the lender agree to these terms? Perhaps. As I said, it may be better than going through foreclosure proceedings and inheriting a house worth $190,000, but this is the first unknown question. The program is entirely voluntary. The FHA and existing lenders may not agree on everything. Determining the existing value of the home may be the first point of contention.

    Many subprime mortgage packages include second trusts. How many existing first and second trust lenders are going to reach an agreement?

    Eligible borrowers must demonstrate a “lack of capacity” to pay the original mortgage but document sufficient income to be able to pay the new mortgage. How many troubled homeowners are able to pass this test? I just don’t know.

    The devil is in the details, folks. While this program, at first glance, appears to be a win-win situation, I have my doubts as to the government’s claim that it will bail out 400,000 homeowners. Time will tell.

  • Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at henrysavage@ pmcmortgage.com.
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