Lenders, government officials, REALTORS®, builders, housing organizations and counseling agencies are all working diligently to improve current programs and create new ones to assist homeowners facing mortgage problems.
As a real estate professional working and living in one of the three states considered to have the largest concentration of mortgage defaults and foreclosures (MI, IN, and OH), you could be facing the most challenging years of your career.
Significant lending reform and loan modifications have been proposed -- and some implemented -- by state and federal governmental bodies and nonprofit organizations. Clients, family, and friends will look to you, a housing-industry representative, as a source of information and opinion on this evolving topic. You may also have an opportunity to influence the outcomes.
To help you get a handle on the issues at hand, we've compiled an overview of the latest news and programs established to help current homeowners keep their homes. It is important to stay on top of these issues as they may also have an impact on how we do business in the future.
Recent policies of the government sponsored enterprises (GSEs) - Fannie Mae and Freddie Mac - require reducing the maximum loan tovalue (LTV) ratio for loans they purchase by 5 percentage points if the property is located in a "declining market."
For example, if the GSE program would otherwise permit a 97 percent loan, the maximum loan-to-value would be 92 percent for properties located in declining markets. This means, in that example, that if the down payment would otherwise be 3 percent, it would be increased to 8 percent for properties in declining markets.
Freddie's policy is long-standing. Fannie Mae had a similar long-standing policy which had been suspended in January 2006. The policy was recently reinstituted in light of challenging market conditions and is effective for loans with application dates on or after January 15, 2008.
These policies will make home buying less affordable and some have questioned the disparate impact of the policies on minorities and lower income areas. The National Association of REALTORS® (NAR) has raised concerns about these policies with the GSEs and both are expected to issue additional clarification.
The policies are designed to result in safer loans in today's market environment and Fannie and Freddie argue that lenders and borrowers both benefit. Their federal regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), supports these policies which they believe will improve the financial condition of the GSEs.
In summary, lenders who sell mortgages to the GSEs have the ultimate responsibility, as they always have, for determining whether the property is in a declining market. But, based on a factually-supported finding by a lender that a particular property is not in a declining market, both of the GSEs will purchase the loan without the 5 percentage point reduction in the LTV. NAR is concerned that some lenders may act unnecessarily cautiously and identify too many properties as being in declining markets. This is especially a concern under the Fannie Mae system which flags individual properties as possibly being in declining markets.
According to the Ohio Association of REALTORS® (OAR), members are well-positioned to provide important information about market values to help both lenders and appraisers determine whether properties are, in fact, located in declining markets. There is absolutely nothing wrong with asking lenders and appraisers to reconsider the comparables, consider better comparables, or consider additional information supplied by a REALTOR®.
Programs
FHASecure
The Federal Housing Administration (FHA) introduced FHASecure in August 2007 to help people who have fallen behind on their mortgage payments as a direct result of subprime lending. FHA-approved lenders are able to offer these homeowners an option to refinance their existing mortgage to a reasonable fixed rate FHASecure loan.
A total of 1,400 Ohio homeowners refinanced into FHA loans in January, 122 percent more than the 632 who did so in January 2007. The FHASecure loan program has helped 4,400 Ohio homeowners refinance since September.
Lenders must determine that borrowers have sufficient income and assets to repay the FHA loan. If the new FHA loan is not enough to pay off the existing first lien, arrearages, and closing costs, a second mortgage may be added to cover the difference.
Although the addition of the second mortgage may cause the liens to exceed the maximum allowable loan-to-value, this is acceptable to FHA. Arrearages incurred after the interest rate adjustment may be included in the loan amounts. However, the FHA first mortgage may not exceed the maximum allowable loan-to-value. Both loans must be included in the debt to income ratios, when underwriting.
Further, the borrower's payment history must show that, prior to the rate adjustment of the mortgage, the borrower was current in making the monthly mortgage payments.
FHA also requires that lenders properly review appraisals and determine that the values are accurate. Lenders will be held equally responsible, along with appraisers, for violations if the lenders knew or should have known appraisals were inflated.
FHASecure currently requires that the loan being refinanced must be a conventionalARM or Interest Only product that has adjusted or reset. As sub-prime ARM loans don't usually reset for at least two years, those written less than 2 years ago, probably won't qualify for this program.
A study circulated within the American Securitization Forum in January proposed the FHA broaden its FHASecure loan refinance program to allow borrowers delinquent for any reason to refinance into an FHA loan.
The number of homeowners FHASecure can help is tied to the FHA loan limit, which is 95% of the median home price for the area. The maximum loan amount in Franklin and surrounding counties is $233,700 plus MIP.
The Economic Stimulus Bill, signed by President Bush on February 13, 2008, will temporarily raise those cap limits to 125% of the area median home price through the end of 2008, and could double the number of borrowers who would qualify.
"If HUD determines that our median home price is still $246,000, we will be looking at a new FHA loan limit of $307,500", said Marianne Collins, Insight Bank Senior Vice President and MBA Board of Governors member.
HUD Secretary Alphonso Jackson has stated that those numbers should be released in early March. The new loan limits will encompass all FHA loans, not just the FHASecure product.
Collins also said that the temporary increase in the FHA limit could get us through the "declining market" increased down payment problems that we are encountering from Fannie Mae and Freddie Mac.
"The GSE's labeling of our area as a declining market has all but destroyed the Community Homebuyer programs, Flex 100, and 80-20 financing. Because of the requirement of the borrower to make a 5% down payment with these programs, buyers are being forced out of the market, which causes further declines in home values and fuels the housing recession."
HOPE NOW
In October 2007, a new national alliance made up of credit and homeowners' counselors, mortgage servicers, and mortgage market participants, HOPE NOW, was formed with the encouragement of the Department of the Treasury and Department of Housing and Urban Development. Hope Now was established to:
- explore a variety of methods to reach out to at-risk homeowners, including a direct-mail campaign to encourage atrisk borrowers to call their mortgage servicer or a credit counselor.
- work to improve communications between servicers and non-profit counselors to speed outreach and to develop and explain options for at risk borrowers.
- develop standards with investors to enable counseling sessions for homeowners to be funded by servicing contracts.
It initially succeeded in allowing subprime borrowers to negotiate a freeze of their teaser rates for five years. It began with an alliance of 25 lenders who successfully modified 13,000 loans and offered 90,000 new plans for repayment. Reportedly, that effort now encompasses 94 percent of the companies that service mortgages.
A February 2008 report says the group has helped 545,000 subprime borrowers in the second half of last year; 150,000 were helped through permanent-loan modifications, such as lower interest rates, while 395,000 negotiated repayment plans.
Project Lifeline
This February, four months after its creation, HOPE NOW, in coordination with the Treasury Department and the Department of Housing and Urban Development, introduced an initiative called Project Lifeline. The plan offers homeowners who have missed three months of mortgage payments a delay in foreclosure proceedings if they seek help in working out new, more affordable loan terms.
On a pilot basis, the plan currently involves the participation of six of the largest mortgage lenders (which service almost 50 percent of the nation's mortgages) and widens the efforts to help delinquent homeowners whether their financing is subprime, prime, alt-A, second mortgages, and home equity loans.
This program also differs from earlier efforts in that the lenders are taking preemptive action instead of relying on the borrowers to make contact. Communication between the borrowers and lenders has been infrequent in most situations. Reportedly, half of the borrowers who lost their homes in foreclosure sales never had any contact with their lender.
The six initial participants are Bank of America Corp., Citigroup Inc., Countrywide Financial Corp., JPMorgan Chase & Co., Washington Mutual Inc., and Wells Fargo & Co. These lenders hope that if the pilot program accomplishes its goals, more lenders will come on board.
According to Hope Now, Project Lifeline will begin by servicers sending a letter to seriously delinquent homeowners urging them to call their mortgage servicer and follow steps that may qualify them for a loan modification. Homeowners uncomfortable contacting their lenders can opt for calling a housing counselor instead.
If appropriate, any pending foreclosure will be paused for up to 30 days during the review process until a formal decision is made and a plan is created. If a suitable plan is established and the homeowner follows the plan for three consecutive months, the loan will be formally modified.
Borrowers not as far along in the foreclosure process may be granted a 60-day extension in which they can try to sell their home or modify their loan terms.
Keep in mind, none of these programs is intended to help those who, whether through poor judgment or bad advice, financed more home than they can afford. Project Lifeline stipulates that homeowners must be living in their home and plan to keep it (borrowers who bought property on speculation or for a second home are not eligible). They may also be required to attend credit counseling.
Mortgage Relief Act
Prior to the Mortgage Relief Act, individuals were required to pay the income tax on forgiven mortgage loan amounts. In other words, when homeowners had to sell their homes for less than they paid for them, and sometimes for less than the outstanding debt, the Internal Revenue Service taxed any loan forgiveness as "income."
The Mortgage Relief Act relieves families of a tax burden when their lender forgives part of the mortgage on a principal residence, whether as part of a work-out, a short sale, or a foreclosure.
Although the bill, introduced by U.S. Senators George Voinovich (R-OH) and Sen. Debbie Stabenow (D-MI), will be available for the 2007 tax season, it is temporary and expires at the end of 2009.
The IRS has released a document (IR-2008-17) to educate taxpayers on complying with the mortgage cancellation tax relief provisions. Borrowers who had some portion of their mortgage debt forgiven in 2007 should receive a Form 1099C from the lender identifying the amount of forgiven debt.
Borrowers must also file a newly created form to report to the IRS that the debt relief was for a qualified mortgage. The new form, Form 982, and its instructions are available at http://www.irs.gov/.
Activities
FHA Modernization
Both the U.S. House of Representatives and the U.S. Senate have passed a FHA Modernization Bill, setting the stage for resolution of differences before the bill can be signed into law by the President.
For example, while the House bill would authorize zero-downpayment FHA home loans, the Senate bill would reduce the required downpayment from 3 percent to 1.5 percent. The Senate also didn't go as far as the House in raising FHA mortgage limits. The current onefamily loan limit is generally 95 percent of the median area home price, subject to floor and ceiling limits of 48 percent and 87 percent of the Fannie Mae/Freddie Mac conforming loan limit. The Senate bill would increase the limit to the lesser of 100 percent of the area median price or the conforming loan limit (currently $417,000), subject to a floor of 65 percent of the conforming limit. The House bill would raise the limit to the lesser of 125 percent of the area median price or 175 percent of the conforming loan limit, while also providing a 65 percent floor limit.
The House measure also would authorize HUD to raise the limits by up to $100,000 to accommodate market conditions. The Senate bill would raise the maximum up-front FHA mortgage insurance premium from 2.25 percent to 3 percent (2 percent to 2.75 percent for borrowers who receive counseling), while the House legislation would authorize a risk-based premium structure.
The Senate version supports banning seller funded down payment assistance programs, such as Nehemiah and Ameridream.
Foreclosure Prevention Counseling
The Columbus Housing Partnership (CHP) provides foreclosure prevention counseling and classes to families who have fallen behind with their mortgage payments. The goal is to provide families with the information and tools necessary to maintain their home by identifying the cause of default or delinquency, identifying intervention strategies, and reviewing budgeting skills.
1-888-995-HOPE (4673) is the toll-free hotline managed by the Homeownership Preservation Foundation (HPF) open 24 hours per day, seven days per week. For more information, REALTORS® can call CHP at 614-221-8889, extension 134.
Other related activity
- To help protect homeowners, Federal banking regulators issued new disclosure guidelines for lenders last year, and they continue to consider new rules. Homeowners must have complete, accurate, and understandable information -- including on the potential increases in their monthly payments.
- The Federal banking regulators recently set forth new guidelines to address lending standards, and they will continue to examine new rules. Lenders have an obligation to ensure that their standards accurately measure whether borrowers can afford their mortgage.
- Federal agencies, such as HUD, the Department of Justice, the Federal Trade Commission, and others, are aggressively pursuing wrongdoers and predatory lenders to ensure they are punished. This will send the message that these practices will not be tolerated.
- The President's FY 2008 Budget request includes $50 million for HUD's housing counseling program.
The best advice that you can give a seller that is delinquent on their loan is to talk to their lender. Do not hide from them and start the dialogue early. There are ways to work things out, if the effort is made early in the game.
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