Hope For Homeowners: New Program Will Help Those in Foreclosures or Those Having Trouble Making Mortgage Payments

The HOPE for Homeowners (H4H) program was created by Congress to help those at risk of default and foreclosure refinance into more affordable, sustainable loans. H4H is an additional mortgage option designed to keep borrowers in their homes.

The program is effective from October 1, 2008 to September 30, 2011.

As many as 400,000 homeowners could avoid foreclosure through this program over the next three years. If you are having trouble making your mortgage payments, HOPE for Homeowners may be able to help you, by refinancing your loan into a new 30-year fixed-rate loan with lower payments.

Here’s how the program works:
Cost: H4H has a built-in mechanism to raise insurance funds to cover foreclosures. Borrowers pay a 3 percent premium up front plus 1.5 percent a year. That’s quite a bit pricier than the standard FHA 1.5 percent up front plus 0.5 percent a year premiums.

The initial 3 percent could be rolled in as part of the refinance, but the 1.5 percent a year effectively means that borrowers will end up with an interest rate around 8 percent (assuming the loan itself is at 6.5 percent). The 1.5 percent premium ends when the homeowner accrues a certain level of equity, but in a declining market, that’s likely to take a very long time.

“Congress set the fees so high because they anticipated a high default rate,” said Bill Glavin, special assistant to the FHA commissioner. “This will help our insurance fund.”

No liar loans: All FHA loans must include full documentation of income and employment. Anyone who falsified information to obtain their previous mortgage is supposed to be barred from this program. Won’t that exclude the hordes of people who took out “liar loans,” swearing they were rolling in dough?

Not necessarily. “It’s up to the lender to make that judgment (if a borrower previously lied); all they should focus on is if they’re now telling the truth and make $30,000 a year, is whether they can hack the mortgage at $30,000,” Glavin said. “They can’t get away with falsification of income this time.”

Income qualifications: Borrowers can participate only if their total housing costs – principal, interest, taxes and insurance – end up as less than 31 percent of their total income (it rises to 38 percent if they successfully complete a three-month trial at the new rate). Their total debt may not exceed 43 percent of income (or 50 percent after the trial).

Glavin agreed that requirement may disqualify a lot of people.

Harper said he thinks two-income homeowners would have the best chance of meeting the qualifications. Many Bay Area homes may be too pricey for the program but nationwide many homes are now at such low valuations that an H4H refinance will work for them, he said.

Securitization: The big stumbling block for many loan modifications is that the bank that collects payments often doesn’t own the mortgage – it acts as a servicer on behalf of investors, who own securitized mortgages that were sliced and diced into packages for sale. Those investors’ agreement often is needed to refinance a mortgage. Glavin said it is possible investors will not agree to do it, and that contacting them could prove to be cumbersome.

Dumping toxic loans: What will stop lenders from putting their worst mortgages into this program to get rid of them?

Glavin said the verified income requirement means only qualified borrowers will get a refinance.

“Most lenders, if they’re going to originate a new loan, they still don’t want to make a bad loan, even if in the end the homeowner defaults and we pay a claim,” he said. “It’s not as if the lenders will go out and continue to work with a borrower who does not perform well.”

Hope for Homeowners plan
How it works
Lenders write down loan balance to 90% of current appraised value.
New loan is 30-year fixed at current rates (about 6.5%).
Borrowers pay 3% up-front insurance premium (can be financed as part of the loan).
Borrowers pay 1.5% a year as insurance premiums.
Housing costs can’t exceed 31% of borrower’s income or 38% if borrower successfully completes 3-month trial period.
Total debt can’t exceed 43% of borrower’s income or 50% after three-month trial.
Second mortgage holders must release their liens.
New loan is guaranteed by FHA.
Who qualifies
Owner-occupants who cannot afford their current loan and do not own a second home.
Borrowers must fully document their income.
Borrowers must agree to share future appreciation in their home.
How to participate
Interested borrowers should contact their lender, a HUD counseling agency or the HOPE Now Alliance at (888) 995-HOPE.
Full details at www.fha.gov
Example
House was purchased for $450,000 and now appraises at $300,000.
New loan at 90% of value is $270,000 (lender writes off $180,000 plus the 3% insurance fee)
New monthly payments are about $2,500 (6.5% interest plus 1.5% insurance plus about $400 a month for taxes and insurance)
Income to qualify: at 31% debt-to-income: $7,740/month, or $92,900/year
At 38% DTI: $6,315/month or $75,790/year

Source: Federal Housing Administration