On Wednesday July 23, 2008 the house passed the Housing Rescue Bill that will inject $300 billion dollars into distressed homeowner loans and bailing out Fannie Mae and Freddie Mac. The bill must now get past the Senate and be signed by President Bush who, until recently, was threatening to veto the bill. Should the bill pass and be signed into law thousands of homeowners who are at risk could be eligible to refinance their precarious unaffordable loans into new FHA low cost loans.
Here are the highlights for homeowners…
To be eligible for assistance borrowers must live in their homes as a primary residence and have loans that originated between January 2005 and June 2007; and they must be spending at least 31% of their monthly gross income on mortgage debt.
Homeowners may be up to date or in default on their existing loan. Either way they will have to prove financial hardship and their inability to keep paying their existing loan payments; in addition to attesting that defaulting is not a deliberate attempt to obtain lower payments.
The obstacle for many homeowners in CA will be this: Prior to approval for an FHA backed loan the homeowner will have to payoff any other debt on the home i.e. home equity loans or home equity lines of credit. They will not be allowed to take out another home equity loan for at least five years. The exception to the five year rule is if the money is required for maintenance of the home. Borrowers will have to gain approval from the FHA to get a new home equity loan and the total debt cannot exceed 95% loan to value at the time the loan is granted.
Since this is a voluntary program for lenders holding the original note, they must agree to rework the loan before the process can proceed. The decision point for these lenders is if they will lose less money on a workout than they would by allowing the home to foreclose. This is because they will be asked to write down the value of the loan to 90% of current property value.
To qualify the borrower and property an FHA approved lender will have to underwrite each loan. This will require the FHA lender to do an appraisal on the property to assess current market value so they can determine the amount the “old lender” will have to write down to bring the new loan amount to 90% of the property’s current value. The FHA lender will also complete a new loan application on the borrower and verify income, reserves, job history, and credit history/scores.
Once the analysis is complete the original lender will make a determination of whether or not to accept the write down. If they do accept the write down the FHA lender purchases the original “reworked” loan. In addition to writing down the loan to 90% of the property’s current market value and accepting the proceeds from the new loan as “paid in full” for the original loan, the original lender writes off all penalties/fees including any pre-payment penalties. The original lender is also required to pay the FHA an upfront fee equal to 3% of the newly originated loan amount.
So, what does the upfront cost the consumer? Not much, as with all FHA loans, the loan origination fees can usually be paid for over the life of the loan, just be aware that origination fees vary lender to lender and you may have a slightly higher interest rate. There is also a mortgage insurance premium associated with FHA loans since the FHA is guaranteeing the loan. This premium is 1.5% of the principal annually and factored into monthly payments.
What is the catch you ask? Borrowers will be entering into a profit sharing agreement with the FHA. Here’s how it works; upon selling or refinancing the home after getting an FHA backed “reworked” loan the borrower will pay the FHA an exit fee equal to 3% of the loan principal. Additionally, borrowers agree to pay 100% of any profits realized from the sale or refinance of the home within the 1st year to the FHA. This amount is incrementally reduced by 10% per year for 5 years where it freezes at 50%.
This bill could provide substantial savings to consumers who meet the guidelines for qualifying and whose original lien holder will accept a short payoff. Not only will those consumers see a financial benefit, they will gain the emotional benefit of knowing their loan is set at a fixed rate of interest over the life of the loan.
The bill also contains provisions for a first time homebuyer tax credit, authorizes states to issue an additional $11 billion of tax-exempt bonds to refinance subprime loans, provide loans to first-time home buyers and fund the construction of low-income rental housing, and permanently raise the limit to $625,000 for mortgages that Fannie Mae and Freddie Mac could purchase.
What is unclear to me is if the amount of forgiveness, the difference between the original loan amount and new loan amount, is covered under the Mortgage Forgiveness Debt Relief Act of 2007. That certainly needs to be made clear to consumers…
Now we wait to see what the Senate has to say!