Although it didn't receive nearly as much press coverage, the $300 billion "Housing and Economic Recovery Act of 2008" (H.R. 3221) may provide more immediate relief for struggling homeowners than the recently signed $700 billion economic bailout, "Emergency Economic Stabilization Act of 2008," (H.R. 1424).
Signed into law in July, the recovery act created the "Hope For Homeowners" or H4H (Division A, Title IV, Section 1402 and Section 1403) program.
• Section 1402, effective Oct. 1, 2008, allows troubled mortgage holders to avoid foreclosure by refinancing into smaller, more affordable, Federal Housing Administration (FHA)-backed mortgages, provided they give Uncle Sam a piece of the equity-growth action and provided the lender voluntarily agrees to the deal by writing down loan balances.
• Section 1403, effective when the law was signed, mandates that mortgage servicers modify loans for certain homeowners to help them avoid foreclosure.
"I think the modification portion is more important than the FHA deal because the FHA deal is a voluntary program and no one is forcing them to do it. Lenders are not going to write down the balance to 90 percent of the current value," as is required for Section 1402 action, said Gibran Nicholas, chairman of the CMPS Institute, a private organization created to certify mortgage bankers and brokers who counsel consumers on mortgage and real estate equity management, as well as home loans.
Stabilization provisions less effective
It's not yet clear how the more expensive $700 billion stabilization act will help homeowners. President Bush signed the stabilization act on Oct. 3, 2008.
For homeowners, the stabilization plan calls for federal agencies (including the Federal Reserve, Federal Deposit Insurance Corp. -- FDIC -- and the FHFA) holding mortgages and mortgage securities to identify loans that can be modified and proceed to modifying them. The provision is unclear about how that task will be accomplished.
The economic stabilization act also has provisions that would allow the U.S. Secretary of the Treasury to use loan guarantees and credit enhancements to help homeowners avoid foreclosures. It also calls for shoring up the H4H program, but in both cases, the mechanics and timing are not clear.
Not so with H4H, under the recovery act, which is already up and running, but may have gone unnoticed in all the $700 billion bailout hullabaloo.
"It kind of got lost in all the confusion of the last several months. Many people are not aware this option exists, we are so focused on the ($700 billion) bailout," said Nicholas.
Recovery provisions more immediate
Under Section 1403 of the H4H deal, mortgage servicers must modify loans for homeowners and help them avoid foreclosure as long as three requirements are met:
1. A default on the mortgage either has already happened or is "reasonably foreseeable."
2. The homeowner is living in the property as his or her primary residence.
3. The lender is likely to recover more through the loan modification or workout than by forcing the homeowner into foreclosure.
However, it's up to the homeowner to prove, in writing, his or her case to the lender and that could take some negotiating, even legal wrangling.
"It may be advisable to consult with an attorney -- especially if you qualify for a loan modification under the law and your lender still refuses to work with you," Nicholas said.
To help homeowners make their case, Nicholas offers a sample letter containing more assistance, and tips to help homeowners negotiate a loan modification.
• Deal directly with a representative of the lender's "loss mitigation" or workout department, not a broker, loan originator or other mortgage staffer.
• Write a hardship letter demonstrating job loss, serious medical condition, balloon payment coming due, adjustable rate reset or some other financial calamity that will make it impossible for you to continue making your mortgage payments as scheduled. By law, you must be in imminent danger of default in order for lenders to be compelled by law to help you.
• Send the lender your financial statements, employment records, tax returns and bank statements demonstrating how you would be able to afford the modified loan terms under your present financial circumstances.
• Send the lender a current appraisal of your home or some documentation on recent comparable sales in your neighborhood demonstrating the current value of your home.
"The key is to demonstrate how the lender is likely to recover less money through foreclosure than they would by working with you in your proposed loan modification plan," Nicholas said.
More immediate H4H help
Also under H4H's Section 1402, troubled mortgage holders can avoid foreclosure by refinancing into smaller, more affordable, FHA-backed mortgages, provided they give Uncle Sam a piece of the equity-growth action and provided the lender voluntarily agrees to the deal.
U.S. Department of Housing and Urban Affairs' "Hope For Homeowners"fact sheets spell out the details.
• The refinanced, 30-year, fixed rated FHA mortgages in the H4H program are for homeowner-occupants (with no additional ownership interest in another home, say, a second home) having difficulty making their payments.
• Banks are not mandated to write the loans, but can volunteer to write down an existing mortgage to 90 percent of the new appraised value of the home. Any holders of existing mortgage liens must waive all prepayment penalties and late payment fees and release the liens. The existing first mortgage holder has to accept the Hope for Homeowners loan as full settlement of all outstanding indebtedness.
• The existing mortgage must have been originated on or before January 1, 2008, and the owner must have made at least six payments.
• As of March 2008, the homeowner's total monthly mortgage payments due must be more than 31 percent of the household's gross monthly income.
• The loan amount on the new H4H mortgage cannot exceed $550,440. The amount can include a financed 3 percent "Upfront Mortgage Insurance Premium" and other loan costs. The homeowner must also pay a 1.5 percent annual mortgage insurance premium.
• The homeowner cannot take out a second mortgage for the first five years of the new loan, except under certain emergency conditions.
• The borrower must agree to share with the FHA, both the equity created at the beginning of the new mortgage and any future appreciation in the value of the home. 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 FHA will share a portion of equity earnings, when available, with past lien holders until any available appreciation is exhausted. Any left over appreciation goes to the FHA.
Some experts say the FHA equity sharing deal is one of the best mortgage ideas to come out of Washington, D.C. since the Great Depression because it could generate mortgage market interest in equity-sharing, a long maligned and often misunderstood, but potentially useful, creative financing technique.
"Every transition in life comes with intermediate stages. Before you are married you get engaged, before you get your driver's license you get a learner's permit. Before you get to homeownership what intermediate transition is there?" say Jeff Langholz, founder and CEO of HomeEquityShare.com, an online network that matches equity sharing partners.
"The feds are about to take equity sharing to the next level," Langholz adds.
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