HOPE for Homeowners Act of 2008
The HOPE for Homeowners Act of 2008 created a new, temporary, voluntary program within the Federal Housing Administration (FHA) to back FHA-insured mortgages to distressed borrowers. The new mortgages offered by FHA-approved lenders would refinance distressed loans at a significant discount for owner-occupants at risk of losing their homes to foreclosure. In exchange, homeowners will share future appreciation with FHA.
Senator Chris Dodd (D-CT), chairman of the Senate Committee on Banking, Housing, and Urban Affairs, in March of 2008 announced his intention to introduce this legislation that would create a new program within the FHA to provide aid to distressed borrowers currently trapped in mortgages they could not afford.
The program is built on five principles:
- Long-term affordability. The program is built on the idea, expressed by Federal Reserve Chairman Bernanke, that creating new equity for troubled homeowners is likely to be a more effective way to avoid foreclosures. New loans will be based on a family’s ability to repay the loan, ensuring affordability and sustainable homeownership.
- No investor or lender bailout. Investors and/or lenders will have to take significant losses in order to benefit from the proceeds of the loans refinanced with government insurance. However, these losses would be less than the losses associated with foreclosure.
- No windfall for borrowers. Borrowers will share their new equity and future appreciation equally with FHA. Borrowers will pay for the FHA insurance.
- Voluntary participation. This will be a voluntary program. No lenders, servicers, or investors will be compelled to participate.
- Restore confidence, liquidity, and transparency. Credit markets are fearful and frozen in part because banks and other financial institutions do not know what their subprime mortgages and related securities are worth. The uncertainty is forcing lenders to hoard capital and stop the lending necessary for economic growth. This program will help restore confidence and get markets flowing again.
The new program will be overseen by a board made up of the secretary of HUD, the Secretary of the Treasury, the chairman of the Federal Reserve Board, and the chairman of the Federal Deposit Insurance Corporation (FDIC). The board will have the authority to develop standards within the framework of the legislation.
Only owner-occupants who are unable to afford their mortgage payments are eligible for the program. No investors or investor properties will qualify. Homeowners must certify, under penalty of law, that they have not intentionally defaulted on their loan to qualify for the program and must have a mortgage debt-to-income ratio greater than 31 percent as of March 1, 2008. Lenders must document and verify borrowers’ income with the IRS.
The size of the new FHA-insured loan will be lesser of the amount the borrower can afford to repay, as determined by the current affordability requirements of FHA; or, 90 percent of the current value of the home. Loans must be 30-year, fixed-rate loans.
In order to avoid a windfall to the borrower created by the new 90 percent loan-to-value FHA-insured mortgage, the borrower must share the newly-created equity and future appreciation equally with FHA. This obligation will continue until the borrower sells the home or refinances the FHA-insured mortgage. Moreover, the homeowner’s access to the newly created equity will be phased-in over five years.
In order to protect against adverse selection, the program prohibits the Secretary from paying an insurance claim whenever the representations and warranties required to be made by lenders are violated, or in cases in which a borrower has an early payment default and misses the first payment. The Act provides the Board the authority to establish other protections against adverse selection, such as requiring “seasoning” for certain higher risk loans before they can be insured under the program. Appraisers of property insured by FHA must be certified by the state where the property is located, or by a nationally recognized professional appraisal organization, and have “demonstrated verifiable education” in FHA appraisal requirements.
The legislation provides servicers with an incentive to participate in the program by offering a safe harbor against legal liability.
The program is authorized to insure up to $300 billion in mortgages and is expected to serve approximately 400,000 homeowners.
The program will begin Oct. 1, 2008 and sunset on Sept. 30, 2011. CBO says the program will net nearly $250 million for taxpayers. The program is paid for by using part of the Affordable Housing Trust Fund; the GSE bill provides a further $2 billion cushion for the government by establishing a reserve fund at Treasury over 10 years. If the program costs less than projected, the unused funds are returned to the Affordable Housing Trust Fund. If the program more than pays for itself (as was the case during the Roosevelt Administration), any excess savings are dedicated to reducing the national debt.