Rep. Barney Frank Proposes Major FHA Changes

Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, is now circulating a proposal entitled the “FHA Housing Stabilization & Homeownership Retention Act.” While just a discussion draft at this stage, the proposal would significantly modify the FHA mortgage program. In particular, the proposal would allow HUD to refinance “at-risk” borrowers, essentially delinquent conventional homeowners who are now facing or are likely to face foreclosure in the near future.

The entire proposal is below:

I. Expanded FHA-Refinance for Individual Borrowers

Summary. Program would permit FHA to provide [up to $300 billion] in new guarantees that would help to refinance at-risk borrowers into viable mortgages. In exchange for the acceptance of a substantial write-down of principal, the existing lender or mortgage holder would receive a short payment from the proceeds of a new FHA loan if the restructured loan would result in terms that the borrower can reasonably be expected to pay. The existing lender or mortgage holder will have a cash payment and no further credit exposure to the borrower. This could potentially refinance between 1 and 2 million loans (and help these families stay in their homes), protect neighborhoods and help stabilize the housing market.

Under the program, a borrower or existing loan servicer of an eligible loan would contact an FHA-approved lender, who would determine the size of a loan that would be consistent with the requirements of the program and that the borrower could reasonably repay. If the current lender or mortgage holder agrees to a write-down that is sufficient to meet the requirements of the program and make the new loan affordable, the FHA-lender will pay off the discounted existing mortgage.

In addition to a first lien, the program gives the government a soft second lien to help defer the government’s costs and prevent unjust enrichment (e.g., borrower flipping). When the borrower sells the home or refinances the loan, the borrower will pay from any profits the higher of (1) an ongoing exit fee equal to 3 percent of the original FHA loan balance; or (2) a declining percentage of any profits (e.g., from 100 percent in year one to 20 percent in year five and 0 thereafter). After year five only the 3 percent exit fee will apply.

Eligibility Requirements for Existing Loans (Requires All of the Following):

___ Owner-occupied principal residences only (no investors, speculators or second homes);

___ [Existing senior loan being refinanced must have been originated between January 1, 2005 and July 1, 2007];

___ To remove any incentive for borrowers to “purposely default,” the borrower must have had a mortgage debt-to-income ratio of no less that 40 percent as of March 1, 2008, and must certify that he/she has not intentionally defaulted on existing mortgage(s). Regulators can make exceptions for involuntary changes after that date;

___ Participating mortgage holders/investors must waive any penalties or fees on the existing mortgage and must accept proceeds of the new loan as payment in full;

___ Existing mortgage holders/investors must accept their losses – taking substantial write-down sufficient to establish a 5 percent loan loss reserve for the FHA, bring the loan-to-value ratio on the new FHA-loan down to no greater than 90 percent of property’s current appraised value, result in a meaningful reduction in mortgage debt service by the borrower, and to pay all up-front fees for the new loan. Accordingly, to qualify, mortgage holders would need to accept a substantial write-down, receiving no more than 85 percent of the property’s current appraised value as payment in full for the existing loans.

Requirements for New FHA-Insured Loans:

___ New FHA loans must be properly underwritten and must be based on current appraised value of the house and borrower’s documented income (borrowers with higher (but not disqualifying) debt levels would need to make six months of timely payments at the new FHA payment level to qualify for the guarantee);

___ New FHA loan must extinguish all existing liens and meaningfully reduce the borrower’s mortgage debt service;

___ New FHA loan must be within applicable FHA loan limits;

___ HUD will set reasonable limits on loan fees and interest rates; and

To reduce costs to the government – and avoid inappropriate enrichment to the borrower – the government will retain a second lien on the property. When the borrower sells the home or refinances the loan, the borrower will pay from any profits the higher of (1) an ongoing exit fee equal to 3 percent of the original FHA loan balance; or (2) a declining percentage of any profits (e.g., from 100 percent in year one to 20 percent in year five and 0 thereafter). After year five only the 3 percent exit fee will apply.

Coordination of Existing Lien-Holders. The Secretary of HUD will be authorized to take action to facilitate coordination among different existing lien-holders.

Separate FHA Fund. To protect the FHA Mutual Mortgage Insurance Fund, these new loans will exist in a separate fund in FHA – and will be permitted to be resold (together or separately) through GNMA.

Improving FHA Capacity. The FHA shall take actions as necessary to increase its capacity, including:

___ Contracting for the establishment of underwriting criteria, pricing standards, and other factors relating to eligibility;

___ Contracting for independent quality reviews of the underwriting of these mortgages; and

___ Increasing personnel.

Of course this is could be a huge help to our troubled Michigan real estate market, so keep your fingers crossed or better yet call or email your congressman.

The Way It Used To Be

The New York Times had a nice article over the weekend regarding Sears kit homes. These were houses you could buy from a catalog. You’d place your order and then a kit would show up ready for assembly. Between 1908 and 1940, says the article, more than 100,000 kit homes were sold.

The part in the article that jumped out, however, had very little to do with wooden parts or windows. The paper interviewed Amy R. Pappas, co-curator of the New Castle Historical Society, and here’s what was reported:

“In the 1930s, during the Depression, the housing market took a sharp downturn, and by 1940, Sears stopped selling kit homes, as many people had lost their jobs and defaulted on their loans. In 1934, Sears liquidated more than $11 million in mortgages and stopped financing kit purchases.

“’Because Sears did not want to be known as a heartless corporation that took people’s homes from them,’” said Ms. Pappas, the curator in New Castle, “’it absorbed most of the losses.’”

Imagine that! A lender that absorbed losses rather than ruin its reputation — even though the lender was not the source of bad loans, bizarre terms or toxic clauses.

Whatever happened to such lenders?