Anna Maria Island Real Estate Sales Blog

Here's a recent summary of the HOPE for Homeowners Act of 2008 which has a lot of information for those now suffering through the housing crisis and at risk of defaulting on their mortgages. This information comes from the law offices of Barnes Walker, with their permission.

August 1, 2008

To Our Realtor® Friends:

            As part of our continuing effort to assist you in helping your clients buy and sell real estate, we offer you the following summary of the federal law just recently enacted by Congress and signed into law by the President to assist homeowners threatened by rising mortgage payments they can no longer afford by offering them a way to refinance and keep their homes:

A Summary of the

“HOPE for Homeowners Act of 2008”

1.                  Effective Date.  The Act takes effect on October 1, 2008, and runs through September 30, 2011.  The Federal Housing Administration (FHA) is responsible for administering the Act, and there is some doubt as to whether (a) the FHA will be ready to supply the guidelines necessary to provide the benefits under the Act by the effective date of October 1, or (b) mortgage lenders will have established FHA mortgage loan programs to take advantage of the Act by that date.

2.                  Benefits.  The Act will allow qualifying homeowners to cancel all of the mortgage debt on their home incurred on or before January 1, 2008, and replace it with an FHA-insured, 30-year fixed-rate mortgage loan equal to 90% of the home’s current value.  This cancellation will:

a.                   Forgive (i) all of the homeowners’ debt above 90% of the current value of their home, and (ii) any prepayment penalties on current mortgage loans. 

Example:  Original home purchase price:  $400,000.00.  Original interest-only first mortgage:  $320,000.00.  Original interest-only equity line second mortgage:  $40,000.00.  House appreciates during the housing boom to $500,000.00.  The equity line is increased to $130,000.00 and fully borrowed upon by the owner.  After the housing bust, the current home value is $200,000.00.  The new FHA mortgage loan would be for 90% of $200,000.00 or $180,000.00.  Since the original mortgage loans were interest only, $450,000.00 in principal on both mortgage loans would still be owed prior to the new FHA mortgage loan, but all except $180,000.00 of that debt would be cancelled; i.e., $270,000.00 would be forgiven.

b.                  Based upon current market rates, the homeowners’ new fixed interest rate could be 1-2% lower than the rates of their previous variable rate first and second mortgages, therefore lowering their payments.

c.                   The homeowners have a new fixed interest rate, which will never go up like the rates of their old variable-rate mortgage loans. 

3.                  Requirements & Obligations.  The borrowing homeowners must meet the following requirements and agree to the following obligations:

a.                   The FHA-insured mortgage loan cannot exceed $550,400.00.

b.                  The home must be the homeowners’ primary residence, not a second home or rental or investment home.  Further, the homeowners are not eligible for an FHA mortgage loan if the homeowners own a second home or, arguably but less likely, rental houses.  The Act does not indicate what the status of a second home would be if it is both a vacation and rental home for the homeowners.

c.                   The homeowners must not have intentionally defaulted on their current mortgage loans to qualify for an FHA-insured mortgage loan under the Act.

d.                  The homeowners must have a monthly mortgage payment to income ratio greater than 31% as of March 1, 2008; i.e., their total monthly mortgage payments must exceed 31% of their monthly income.  Before homeowners can use an FHA mortgage loan, the homeowners’ lender must document and verify the homeowners’ income with the IRS.

e.                   In exchange for this FHA-insured mortgage loan, the homeowners must pay to the FHA a substantial share of any cash they receive from the future sale or refinancing of their home.  The cash the homeowners receive comes from (i) any appreciation or increase in the value of the home that occurs over time; and (ii) the initial 10% equity they receive when they obtain the FHA mortgage loan, plus the increase in that equity that occurs as they pay down the mortgage loan.  The cash derived from appreciation is divided and paid 50% to the homeowners and 50% to the FHA.  The cash derived from equity is shared between the homeowners and the FHA based upon when the sale or refinance closing occurs in relation to the closing on the FHA loan as follows:

FHA Share       Homeowners’ Share

Within 1 year:                     100%                       0%

Within 2 years:          90%                     10%

Within 3 years:          80%                     20%

Within 4 years:          70%                     30%

Within 5 years:          60%                     40%

5 years or more:                   50%                     50%

            There is no phase-out over the years of FHA’s entitlement to its share of the cash from the sale or refinance closing, whether said cash is derived from appreciation or equity. 

Example:  Using figures from the previous example, the devalued home of $200,000.00 begins to appreciate again, ending at a value of $300,000.00, when it is sold at that price 3 ½ years from now.  The $180,000.00 mortgage loan is paid down from $180,000.00 to $160,000.00.  Commission and closing costs total $20,000.00.  The homeowners’ and the FHA’s shares are calculated as follows: 

Appreciation = $300,000.00 price - $200,000.00 value at the time of the FHA mortgage loan = $100,000.00.

Gross Equity = $200,000.00 value at the time of the FHA mortgage loan - $160,000.00 current FHA mortgage loan balance = $40,000.00.  Net Equity = $40,000.00 Gross Equity - $20,000.00 in commission and closing costs = $20,000.00.*

     FHA           Homeowners

Homeowners’ Share of Appreciation = 50% x $100,000.00 =                            $50,000.00

FHA’s Share of Appreciation = 50% x  $100,000.00 =                        $50,000.00  

Homeowners’ Share of Equity = 30% x $20,000.00 =                                        $  6,000.00

FHA’s Share of Equity = 70% x  $20,000.00 =                                    $14,000.00

            TOTAL                                                                                    $64,000.00        $56,000.00

            *The Act is silent as to how closing costs will be handled.  This example reflects the author’s best guess.

4.         Limitations & Uncertainties.  Even if a homeowner qualifies and meets the requirements of Paragraph 3 above, these new FHA-insured mortgage loans will probably be difficult to obtain due to the following limitations of the Act:

                        a.         The Program is voluntary for lenders, so the Act does not require that either first or subordinate mortgage lenders agree to a replacement and cancellation of their mortgage loans in exchange for an FHA mortgage loan.

                        b.         The home’s “current value” for FHA purposes is the amount for which it could be sold.  The current mortgage lender, however, will lose another 10% of that value because its current mortgage loans must be written down to 90% of that value, whereas, if the lender completed a foreclosure of the home, it would recover 100% of that value.  This is a disincentive for the mortgage lender to agree to an FHA mortgage loan unless the cost of foreclosure and the cost to the lender of selling the home after foreclosure – e.g., broker’s commission, repair costs, payment of delinquent taxes and association dues, maintenance costs over time, etc. – exceed that 10% of the value.

                        c.         The lender must pay the FHA for the benefit of the FHA’s insurance: (i) an initial premium equal to 3% of the loan amount, and (ii) an ongoing premium of 1½% of the loan balance annually.  These premium payments create an additional disincentive.

d.         The homeowners’ mortgage lender must believe, and make representations and warranties to the FHA, that the homeowners’ current income and expenses will allow them to repay the FHA mortgage loan, as determined by the FHA’s current affordability requirements.  This creates legal liability to the FHA on the part of the lender.

                        e.         If the homeowners cannot afford to make the payments on an FHA mortgage loan equal to 90% of the home’s current value, the FHA mortgage loan amount must be decreased until the homeowners can afford the payments necessary to repay the decreased loan amount.  This, in turn, increases the amount that the first mortgage lender and subordinate lien holders must write off, creating a further disincentive.

f.          The mortgage lender involved in originating the FHA mortgage loan is typically the homeowners’ first mortgage lender, and it is required to obtain the agreement of subordinate mortgage, judgment, and tax lien holders to extinguish their loans and release their liens before the FHA will approve the new mortgage loan.  This require the first mortgage lender to pay the subordinate lien holders for a release of their liens, which is another financial disincentive for the first mortgage lender to agree to an FHA mortgage loan.

                        g.         While the program is authorized to insure $300 billion in mortgage loans, that amount is expected to serve only approximately 400,000 homeowners in the entire United States.

                        h.         If homeowners are barely making their mortgage loan payments, ignoring other debt obligations to make their mortgage payments, or are soon going to be unable to make their mortgage payments, their mortgage lenders probably will not agree to an FHA mortgage loan until the homeowners stop making those payments.  On the other hand, if the homeowners choose to stop making payments before their ability to do so ends, the homeowners have intentionally defaulted and would be ineligible for the new FHA mortgage loans.  Therefore, homeowners are in a “Catch-22.” 

            5.         Effect on Credit.  The Act is silent regarding the effect on homeowners’ credit if they obtain an FHA-insured mortgage loan under the Act.  Since the Act is silent, and the mortgage lender and subordinate lien holders are actually writing off all or portions of the debts owed to them by the homeowners, we are assuming that use of these FHA mortgage loans will adversely affect the homeowners’ credit ratings, although we do not know by how much.

Please contact Barnes Walker, Chartered, at 941-741-8224 if you would like

more information about this Act or how it applies to a specific homeowner. 

Also, please contact us for presentations of the following free seminars for Realtors®:

Short Sales 101

Real Estate Tax Appeals 101

Amendment 1 & Homestead Portability

Contract to Closing

Business Sales 101

Sincerely,

Garret T. Barnes                Adron H. Walker