With previous efforts to aid homeowners who are facing foreclosure or whose home values are "underwater" making only a slight dent in foreclosure projections, Congress has passed carrot-and-stick legislation called the Helping Families Save Their Homes Act to encourage both homeowners and lenders to take advantage of government mortgage programs. What has changed in this new bill since the U.S. Treasury announced its foreclosure prevention plan in March is that lender participation in government plans is now required as long as consumers meet eligibility requirements. In addition, some administrative burdens have been removed, borrowers are no longer required to produce tax returns for income verification and FHA premiums on modified loans can potentially be lower.
The new law requires servicers to modify loans and approve short sales for consumers under Treasury approved programs as long as three requirements are met:
- Default on the mortgage needs to be reasonably foreseeable.
- The homeowner must occupy the property as their primary residence.
- The mortgage company needs to be able to recover more from the loan modification or short sale than they would by sending the home into foreclosure.
The requirements have not changed from those set up in October 2008 for the Hope for Homeowners program, but "this new law is more effective because it specifically states that servicers must consider any of the plans that have been endorsed by the U.S. Treasury including the Obama administration's Making Home Affordable plan – when making their decisions," said Gibran Nicholas, Chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers.
Incentives for Lenders
Under the Making Home Affordable plan lenders agree to adjust a mortgage if the homeowner agrees to pay an FHA insurance premium. To participate in a loan modification to a long term fixed mortgage, the lender will have to first reduce payments on mortgages to no greater than 38 percent Front-End Debt-to-Income (DTI) ratio. The Treasury Department will match further reductions in monthly payments dollar-for-dollar with the lender/investor, down to a 31 percent Front-End DTI ratio for the borrower.
An added incentive for lenders is that the FHA premiums have been reduced in the new law to "not more than" 3 percent up front and 1.5 percent annually. This means that the current lender may only need to reduce the principal to 90 percent of the current home value instead of the 87 percent that was previously required.
Up-front and Pay for Success fees are paid to lenders who participate in the program.
New and Improved FHA Hope for Homeowners Program
Estimates of the numbers of families helped by the October 2008 $300 million Hope for Homeowners program vary from one to 50, but as modified in the new law, it is expected to attract greater participation from lenders. Lenders will be eligible to receive the same fees as for other government plans. FHA premiums are also reduced, which have the effect of increasing the amount modified or refinanced to 90 percent of the value of the original loan. First and second lienholders may now collect a percentage of any improvement in property values. The law:
- Changes the provision for Housing and Urban Development (HUD) to receive 50 percent of appreciation profit sharing to authorize "up to 50 percent" of such profit sharing; and allows HUD to share this with the existing first or subordinate lienholders to induce loan writedowns; cap profit sharing at up to the appraised value of the property when the existing loan was made.
- Permits payments to servicers of existing mortgage loans on the property and to underwriters of the new FHA loan for each successful refinance.
According to a White House press release, Hope for Homeowners targets help to underwater borrowers, who often face heightened risks of foreclosure, by requiring principal writedowns to help homeowners increase the equity they own in their homes. The legislative modifications to the Hope for Homeowners program will ease restrictions on eligibility and enable refinancing of underwater mortgages for a greater number of borrowers.
Experts estimate that homeowners who are "underwater" on their loans may be eligible for refinance if their home loan is 105 percent of the current value of their home.
FHA and RHS Foreclosure Prevention
The new law expands the authority of the Federal Housing Administration (FHA) and the Rural Housing Service (RHS) to engage in foreclosure prevention in their respective single family loan programs, by allowing for both FHA and RHS the following new tools, according to the House Committee on Financial Services summary:
- Partial Claims. Permits partial claims of up to 30 percent, which will allow reductions in debt service down to levels affordable to the homeowner.
- Standard for loss mitigation. Permits loss mitigation tools to kick in for loans that face "imminent default" (i.e., not just loans in default).
- Assignment Authority. Gives both FHA and RHS authority to facilitate loan modifications through assignment of loans, to address servicer loss mitigation disincentives relating to having to purchase loans from Ginnie Mae pools.
Other Significant Provisions
The Helping Families Save Their Homes Act extends through 2013 the temporary increase to $250,000 in deposit insurance coverage for both the FDIC Deposit Insurance Fund and the National Credit Union Administration (NCUA) (the temporary increase is currently scheduled to sunset on December 31, 2009).
The bill allows tenants to remain in their residence, pursuant to their lease, following a foreclosure, except when the successor in interest or subsequent purchaser will occupy the unit as a primary residence. Borrowers must be notified when ownership of their mortgage changes.