Relief due but HOPE has limits


July 20, 2008|By KEN HARNEY

After six months of haggling and political gamesmanship, a huge housing-relief bill is heading for final approval.

Though it has hundreds of pages and dozens of separate initiatives - including revamping federal oversight of mortgage giants Fannie Mae and Freddie Mac - the centerpiece is a $300 billion "HOPE" program designed to provide refinancing lifelines to as many as 400,000 homeowners in trouble on their current loans.

But what are the specifics? Who will be able to qualify for help? How quickly will HOPE be up and running, and how long will it run? Are there any key drawbacks? Here's a quick overview:

Congress' basic idea is to save people on the edge of the waterfall: families and individuals at immediate risk of losing their houses, but who could avoid foreclosure if their mortgage balances and interest rates were significantly reduced.

The program will be entirely voluntary - and that's a crucial limitation. Lenders and investors who own defaulting mortgages cannot be compelled to allow their borrowers to refinance. If they conclude that they're likely to lose less by allowing delinquent borrowers to go to foreclosure rather than refinance into HOPE loans, they'll be free to do so, even if their borrowers want to participate.

Lenders will have to agree to substantial write-downs of principal and penalty fees currently owed to them. The new maximum HOPE loan amount - insured by the Federal Housing Administration under a new fund created by the legislation - will be 90 percent of the current market value of the property, not the value of the house when the lender originally made the loan.

Plus, the FHA will impose an upfront insurance fee of 3 percent of the new loan amount, payable out of refinancing proceeds that would otherwise go to the original lender. Before participating in the HOPE plan, lenders also will have to clear away any potential issues with holders of second liens on properties - typically, banks that have extended equity credit lines or second mortgages and have a claim on any refinancing proceeds. There also are important hurdles that borrowers must get over to qualify. They must:

*Demonstrate a "lack of capacity" to pay their current mortgage but have enough income to make regular monthly payments on a smaller, fixed-rate FHA loan. Their current income-to-mortgage debt ratio must be above 35 percent.

*Certify to the government that they haven't "intentionally defaulted" on their current mortgage or on any other debt in order to refinance into a HOPE loan.

*Agree to use and occupy the refinanced house as their principal residence, and not own any additional houses.

An important and somewhat unusual feature of the program is the federal government's requirement that homeowner beneficiaries share any appreciation profits or equity gains from sales of their houses in subsequent years. The message here is that HOPE is no free ride. The refinancing process itself will essentially create new equity stakes for borrowers because the maximum loan amount will be 90 percent of the appraised market value of the property.

Borrowers who had been underwater and in serious default will suddenly find themselves with 10 percent equity stakes overnight. But they won't be able to tap that money quickly. If the home is sold within the first year after the refinancing, the FHA must be repaid the equity created in full. In sales occurring during the next four years, homeowners can retain rising percentages of the equity, up to 50 percent.

Under the legislation, the HOPE program could start as early as Oct. 1, but must terminate on Sept. 30, 2011. The unanswerable question hovering over the entire HOPE concept: Will enough lenders and investors agree to take the upfront losses required to participate?

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