Monday, October 27th, 2008 at 5:30 PM
‘Hope for Homeowners’
We had the first experience today with the FHA Secure/Hope for Homeowners program.
After waiting for months to see if a client’s offer to purchase would get accepted on a short-sale listing, we got the news last week that WE WON!
The listing agent said today that the deal is now off, because Countrywide, the existing lender, offered the seller assistance through the Hope for Homeowners program. Instead of selling the property to a solvent buyer who can afford the home by normal standards, Countrywide is going to reduce the existing mortgage to 90% of the current appraised value, and FHA-refinance the new amount.
While we’ve known for months that this program was coming, little did anyone know that they’d be picking off approved short sales. We’ll keep an eye on this property, because I’ve already seen three other homeowners who were offered a loan modification get foreclosed anyway, so it ain’t over yet.
If it goes through, the borrower will wave goodbye to roughly $125,000 in debt, and see his monthly payment lowered by about $1,300 per month.
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Here is a link to the Hope for Homeowners program:
http://banking.senate.gov/public/_files/HousingandEconomicRecoveryActSummary.pdf
Some of the highlights:
The loan amount is reduced to the “lesser of the amount the borrower can afford to repay, as determined by the current affordability requirements of FHA; or 90% of the current value of the home.”
“In order to avoid a windfall to the borrower created by the new 90% loan-to-value FHA-insured mortgage, the borrower must share the newly-created equity and future appreciation equally with the 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 5 years.”
“Before participating in this program, all subordinate liens must be extinguished. This will have to be done through negotiation with the first lien holder.”
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Here is a link to the story from the LA Times last Friday that descibed in detail the Countrywide loan-modification program:
http://www.latimes.com/business/la-fi-countrywide24-2008oct24,0,2554852.story?track=rss
Highlights include:
1. The federal program cuts the principal amount to 87% of the home’s current value. (I read elsewhere that the lender then sends the 3% difference to FHA)
2. Subprime loans to revert to the teaser rate for up to five years, and if the borrower can’t afford that, cut the interest rate to as low as 2.5%.
3. Option-ARMs borrowers could see their loan amounts reduced to 95% of the current value of their home, but would lose the ability to pay less than the interest owed monthly.
The idea is to modify a loan’s terms just enough to create a new monthly payment, including principal, interest, taxes and property insurance, equal to 34% of a borrower’s verified monthly income.
Posted on Monday, October 27th, 2008 at 5:30 PM in Loan Mods | 43 Comments » | 
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Enjoy this biscuit too:
“The program will begin October 1, 2008 and sunset on September 30, 2011. CBO say 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 ten 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.”
Jim the Realtor | October 27th, 2008 at 5:34 pmIt happened to me a couple of weeks ago. It is a good thing in a way. The new valuation has been established and when the person needs to move (up, down, lateral) it will be a regular transaction.
BGinRB | October 27th, 2008 at 6:15 pmIt really sucks if you a frugal owner of a housing unit.
What are the cut offs for this program? Aren’t they limited to whatever the FHA is buying?
Will we be able to see which homes’ mortgages have been modified through this program, with the specific details?
JtR,
What are your predictions on what this will do to the stabilizing of the housing market (at various pricing levels) over the next 2 years and beyond?
It seems that this will put less pressure on the banks that hold the loans and slow down the overall bubble deflation, but will it be a few years before we find out if this actually works?
Is this just adding one more, very long step in the foreclosure process? I’m sure some homeowners will benefit from this, but it will be a long time before we know what percentage that is.
E-leven | October 27th, 2008 at 6:29 pmWow, a program like this would really have helped my coworker who had to sell his Mercedes because he couldn’t afford the payments. Let’s just lower his car payments until he can afford it again. And lately, I’ve had to stop eating out at nice restaurants, but I’d definitely go back if they’d adjust the prices for each person’s level of affordability. Everybody could use a discount on gasoline, how about we price it at your Income / 20,000 (ex. make $50K, pay $2.50 a gallon).
At this rate, we won’t even need money anymore. Our economy could be based on only paying what you can afford, rather than owning only what you can afford. What’s that kind of system called again?
It’s worth noting that vast majority of people who made the right decisions are out of luck. In fact the more equity or down payment you put into your home, the more you will eat. You should have put as little down as possible, and now you’ve learned your lesson.
BDiego | October 27th, 2008 at 7:59 pmEffing unbelievable! Hubbie and I are soooooo screwed for being financially responsible and putting 25% down on a 2004 house purchase and then paying for all upgrades in cash, while driving our paid for 1998 and 2002 cars. If we had had enough foresight to game the system and overwhelm ourselves with debt we too could have our principal balances reduced while driving luxury cars.
no_techie | October 27th, 2008 at 8:38 pmI don’t want to hear any more crap about homeowners not getting bailed out now.
Anonymous | October 27th, 2008 at 8:53 pmBah if you get a bailout from this program you should be required to install special license plate frame/and or wear a T-shirt or something so your fellow taxpayers can demand you thank them for keeping your sorry a** out of the gutter
Brucie | October 27th, 2008 at 9:04 pmJim,
Sorry to hear your buyers got the shaft.
Other taxpayers eating the bad debt I would have no problem with “FHA Secure/Hope for Homeowners” program as long as new 90% appraised value principal loan amount was recorded as a sale price so that the comps would reflect the true market value. Sadly we know this won’t be the case as our government attempts to re-inflate the housing market and fix prices. This market manipulation is exactly why are going to see a greater depression. Who in their right mind would play this rigged game. Savers will be rewarded with the ability to feed their families.
JE | October 27th, 2008 at 9:22 pmLike no_techie above, I’ve seen about $200,000 in equity go up in smoke because I was such an idiot and put a ton of money down on a house in 2005. No bailouts for us morons. I’ll never do that again. What a country!
NC | October 27th, 2008 at 10:08 pmWow — now I want my absentee ballot back so I can vote for McCain! This is crazy.
I am going to write Mr. Frank and my representative. I would have no problem with this as long as the govt got all the equity up to 100% of the write down plus 8% per year. And the only way the homeowner gets out of giving up that portion of equity is to either repay the write down or sell the house and take the net if any.
But it sounds like if they refinance the lower prinpal new mortgage amount, the equity sharing goes away! Is that true? I couldn’t find it in the bill but Jim your post says this is what happens — but it is vague and not clear how that works.
And for everyone else out there — tell your friends, family and co-workers about this. I was on the phone with my Dad who said “no way — we can’t afford to do this as a country” to which I said — believe it — it is happening. We need to have the same level of response as garnished against the bail out to stop this — let the market correct I say and faster the better. And I will now have no sympathy for telling those who over extended to their face that they caused this crisis and they should be very ashamed of trashing our fine country for doing so.
Bob | October 27th, 2008 at 10:23 pmIt’s freaking CRIMINAL. The government is arbitrarily making and breaking people with these random programs.
Jay Jay | October 27th, 2008 at 10:26 pmhttp://money.cnn.com/2008/10/27/real_estate/Hope_Now_rises_in_September/index.htm?cnn=yes
“Federal Housing Authority will guarantee refinanced loans if lenders agree to write down the mortgage balances to 90% of a home’s market value.”
Bottom line, the government will give underwater homeowners instant 10% down in equity if you default on your mortgage on an unaffordable house. The less down payment you made, the bigger your bailout. The higher in the bubble you bought, the bigger your bailout. No bailout if you bought what you could afford. In fact, you should not have made any down payment because that actually reduces your bailout dollar for dollar.
Now that the FHA will guarantee this mortgage, the lenders have no incentive to care if the new mortgage will ever be paid back. They just collect the profits risk free. The more fraudulent the lender, the more of their loans will qualify. A win for Countrywide, and a big middle finger to honest lenders who didn’t dabble in sub-prime.
The numbers are staggering. The FHA have by their own admission prevented 2.5 million honest Americans from buying homes that would have ended up on the market. Half of these homes got loan modifications, the other half got repayment plans.
IndyMac has a plan to “reduce mortgage payments to 38% of pre-tax income for troubled borrowers who qualify.” What this means is you really should have bought the most expensive and biggest house possible! With one stroke of the pen they’ve upgraded the most irresponsible speculation into a guaranteed investment for the newly minted rich. Redistribution of wealth indeed!
BDiego | October 27th, 2008 at 10:31 pmThere is one little rule in this Hope for Homeowners bill that is interesting – I believe you are disqualified if you lied about your income. This puts a sharpie through most of San Diego County. I’ll post a link tomorrow if nobody else has it.
JC | October 27th, 2008 at 10:45 pmJE makes an excellent point about these re-writes being recorded as sales or comps for future sales in the neighborhood.
These written-down amounts are the actual sales prices, not what was recorded during the peak. These buyers could not afford the previously-recorded sales prices, therefore there was no real sale at the higher price.
We are all socialists now.
CA renter | October 28th, 2008 at 1:08 amCA good point, appraisers should be required to cross off all crammed down houses for the purposes of comps. The same as any house sold to a straw buyer. In fact, appraisers should be appraised, or at least banks need to send their own independent auditors to check the sanity of appraisers on <25% down loans.
BDiego | October 28th, 2008 at 1:14 amCan I have my loan modified UP to 90% and the payment stays the same?
Rob Dawg | October 28th, 2008 at 5:53 amE-leven,
The FHA will have to include the equity-share program on their trust deeds, to ensure their position – so we’ll know who and how many benefitted.
Overall effect of the ‘No Hope For Homebuyers’ program?
1. Angrier prudent buyers may delay purchasing out of spite.
2. Fewer short sales on the market (that’s good)
Generally it’ll fortify your position. Sellers will think it’s a reason to hold out longer on price even though nobody’s made an offer in months. Buyers will either give it more reason to stay on fence, or be resigned that the government is against them and buy anyway.
Jim the Realtor | October 28th, 2008 at 6:23 amI think after spending I night pondering this that the best thing for those of us angrier wise people now holding all that cash on the sidelines should do is write our senators and representatives and demand that all of these loans on the Hope for Hopeless program be recorded as sales on the local MLS. At least that way we will benefit from lower comps and lower prices. And if this does not happen, let your senator know your cash will continue to remain on the sideline. Until this cash goes back into the investment community, we will have no recovery. And no recovery in 2 years, means a much harder re-election campaign for these guys.
Bob | October 28th, 2008 at 7:09 amJim,
What was the “current value” that they got 90% of, and what was that compared to the short sale offer?
Ted | October 28th, 2008 at 7:27 amThis plan is equally unfair to responsible homeowners, it screams stop paying your mortgage so you can receive the same benefits. I can’t think of a better way for the federal government to discourage people from buying houses.
JE | October 28th, 2008 at 7:58 amTed,
I was using a hypothetical based on the short-sale-approved price.
Jim the Realtor | October 28th, 2008 at 8:23 amI’m with Rob – homeowners should be able to refi UP to 90% with a payment based on what you can afford.
Same difference.
But still unfair to renters. At least they should throw in a interest rate buy-down to 4.75% or 5% so homebuyers can benefit too.
Jim the Realtor | October 28th, 2008 at 8:27 amGoing to play Devils Advocate.
The only people who would take advantage of this are those who plan on living in their home for an extended period of time. They are also willing to give up HALF of any future profits from the sale. (Unless I’m reading it horribly wrong)
If the grand plan is to slow down foreclosures, and attempt to keep this as orderly of correction as possible as we (eventually) inflate our way out then I’m not sure this is such a terrible thing.
This should not cause responsible homeowners to stop paying their mortgage. Why on earth would you willingly sign up to split the proceeds 50/50 in the future for a writedown today?
I see this as an avenue for people who made a stupid financial decision, allowing them to make yet another all in the desire to ‘keep’ the home they cannot afford.
Is it fair to those of us (like myself) who have been waiting for these houses to come back on the market from owners who couldn’t afford them? Absolutely not. But then again life isn’t fair, and if you didn’t anticipate something like this happening you’ve had your head in the sand.
End Devils Advocate.
sdnerd | October 28th, 2008 at 8:37 amAfter beating my head against the wall all morning, I have come to the same conclusion as Bob: we need to at least demand that these write-downs be recorded as comps. Otherwise, the market will stall at the ridiculously high prices, and all of us potential buyers are screwed.
Notice too that this nifty program comes about just as all the poor folks have been thrown out of their homes (subprime resets are pretty much over) and just in time to save the rich asses of those with Alt-A loans who overextended themselves in areas such as Bressi Ranch. So much for seeing those high areas go into resets & adjustment!
So where do I sign up? Is it too late to buy a Million Dollar place on the coast and then have the government adjust my loan to what I can actually afford????
I think I’m going to get sick.
Simone | October 28th, 2008 at 8:41 am“Why on earth would you willingly sign up to split the proceeds 50/50 in the future for a writedown today?”
What proceeds? These people bought at the top of the bubble. Do you really believe prices will get back up again to those levels in the next 15-20 years?
Scenario: House bought in 2005 for $630K with 0 down. Comps are now at $425K. They get to refinance the place for $383K, or less if they can’t afford that. Why wouldn’t they???
Simone | October 28th, 2008 at 8:48 amOh, and this is what pisses me off on a very personal level: I would gladly buy that house for $383K. In fact, that’s what I’ve been waiting for for the whole last year. But now the comps will stay at $425K, or higher, and I can’t buy a decent house. Because I was too stupid to gamble a few years back.
Ok, ok. I will shut the computer off now and continue banging my head into the wall.
Simone | October 28th, 2008 at 9:02 amSimone,
What’s worse is they get 90% LTV, so that’s an extra 10% free down payment on top of the price you’d pay.
But obviously all honest Americans had this coming and can expect nothing better. 2.5 million honest Americans were prevented from buying a home the previous owner could not afford, and this is the lesson the government wants us to learn:
* You should have put 0% down. The government will give you 10% equity if your house goes down in value.
* Buy the most expensive and biggest house possible. You keep unlimited profits if it goes up, but you gain 10% equity no matter how far it goes down.
* There is no such thing as a house you can’t afford anymore!
But yeah, anything the government does is inevitable by definition.
BDiego | October 28th, 2008 at 9:11 am“Do you really believe prices will get back up again to those levels in the next 15-20 years?”
Yes, currently I do. But probably not for the reason you thinking.
I believe the plan is to ultimately inflate our way out. It won’t happen overnight.
Once stability is returned, I anticipate we are going to find ourselves in a sea of dollars. Businesses are going to have access to large amounts of money, and ultimately we will have inflation (including wage).
Your McDonalds Happy Meal may cost $10, but that seemingly absurdly priced house of years past will no longer seem that bad.
BTW, with your example at 5% inflation you get back to the bubble price in roughly 9 years. 15-20 years is a long time.
sdnerd | October 28th, 2008 at 9:16 amJTR,
What will the practical effect of the program be for the North County area in terms of limiting inventory and pricing? Everyone reading your blog finds the concept of this program odious, however, my hope is that there won’t be a big impact of this program in the nicer areas.
Hoping to Buy | October 28th, 2008 at 9:21 amJim,
That’s the scary thing. With no transparency, the bank could have had it appraised at 20% above your offer, so even with a 10% discount to appraised value, they are better off and the taxpayer loses.
Ted | October 28th, 2008 at 9:37 amThis is simply SOCIALISM disguised as Hope and Change sold by slick marketing and a lot of fine print.
stevea2z | October 28th, 2008 at 9:54 amInflation is the backdoor tax, taxing all assets held. If you valued everything in dollars, you’d see the wealth was simply being redistributed from everything back to the government through dollar dilution (i.e. printing money). Which is then redistributed as the government sees fit to deadbeats, the corrupt rich, and the corrupt poor. The vast majority of Americans, everybody else, is out of luck.
BDiego | October 28th, 2008 at 10:04 amWhen I read the “highlights” of the program, It just pisses me off! We sold a house in Allied Gardens last year for a loss (had a baby and outgrew it in 2 yrs). We sucked it up and thought, “no problem, north county is getting plummeted, we’ll make it up on our next purchase.” Well, we’ve been looking in San Marcos for a few months and have made an offer on an REO (response back is like molasses) and also a short sale (supposedly approved). Watch! I wouldn’t be surprised if the short sale we’re trying to get goes all to hell. The sellers will get all teary eyes with the bank and blah, blah, blah, wah, wah, wah!
So, while I hunt and hunt for decent buy (with 10% down and perfect credit) and battle multiple offers on anything that has a yard and isn’t destroyed, these bailed out home owners will be sitting in their upgraded homes with their 60″ plasma and two beemers in the garage.
Guess I should have kept my gas guzzling Range Rover now that gas is going below $3 a gallon. Boy, the more responsible I am, the more I get screwed!
sd_momma22 | October 28th, 2008 at 10:26 amThat does not refute the position that in 15-20 years homes will likely cost significantly more dollars then they do today. The end result is inflation still increased prices for assets such as housing.
You have to be incredibly short sighted to sign the deal for one of these programs. In virtually every scenario, you would be far better off handing over the keys, saving up a war chest, and purchasing again in the next 2-4 years.
Again, this is NOT a good deal. It’s not something you want to be able to take advantage of, it doesn’t scream stop paying your mortgage, etc.
This alone is not going to cause prices to start increasing. If it has any significant impact, it will be to help support a pricing floor by reducing distressed sales. In turn, all that will do is lengthen the flat bottom while inflation does it’s thing.
And yes, that is incredibly frustrating for those of us waiting to buy in the nicer areas.
sdnerd | October 28th, 2008 at 10:42 amThe only stumbling block to “inflating out of this mess”, is that the foreign investors may not be so happy to hold on to US$ if the inflation numbers rise significantly. And without the Chinese and the Russians and Saudis to finance our debt, where will we turn to finance our consumerism?
Byomkesh | October 28th, 2008 at 10:45 amByomkesh,
That’s one very practical roadblock, because right now at our low interest rate most of our deficit is interest payments. The USA paid triple and more interest rates during inflation, which in today’s terms would mean breaking $1 Trillion in interest payments a year. Interest rates for buying a house would break 15% again, if inflation is what we’re asking for.
BDiego | October 28th, 2008 at 11:03 am“HOPE NOW claims to have helped avoid 2.3 million foreclosures. But critics say this significantly overstates actual on-the-ground help.”
…
“RealtyTrac’s Starga says more than a third of work-outs end up back in default within three months, reducing these efforts to just “delaying the inevitable.””
Article up on CNBC if you want the whole read.
sdnerd | October 28th, 2008 at 11:12 amI found this to be amusing: http://www.cnn.com/video/#/video/us/2008/10/28/ca.woman.chain.cnn
It sounds as though the woman feels entitled to keep with home without making the payments. I think that sums up the attitude of the people who fed the bubble.
Hoping to Buy | October 28th, 2008 at 11:14 amI’m not sure why so many here think this will prop the over-inflated house prices up. If you look at the subprime areas of CA, those prices are already down 60-70% from their peak. If someone in those areas qualifies for this program, they will have their house appraised at 90% of these currently low prices. They will also have to verify income, assuming they still have a job. The bottom line is that this will not re-inflate prices. It might reduce and will likely slow down the tsunami of foreclosures, but it will not re-inflate prices. Remember, prices became inflated because people could buy more house than they could afford, because of the various loan programs that were out there. Those loan programs are gone.
The question is still, what becomes of the prices as we move up the food chain from subprime to prime? What’s the cut off ($ amount) for qualifying for the FHA program? How easy will it be to get into this program if you have a 1st and a 2nd or you’ve refinanced into a full-recourse loan? What becomes of homeowners that bought their home decades ago but refinanced during the bubble and pulled out all that equity?
How much equity has already been lost since the peak? $2 trillion+? There’s not enough in that $700 billion bailout (especially with $250 billion already given directly to the banks) to make up for the equity that’s already been lost.
By the way, subprime is not dead yet (it’s more like an undead zombie that’s coming back from the grave to eat your equity!)…
http://www.housingwire.com/2008/10/27/subprime-delinquencies-piling-up-again/
E-leven | October 28th, 2008 at 11:41 amsdnerd,
So we have 1/3 of the workouts getting more free rent, and the other 2/3 getting a “whatever you can afford” rent reduction.
Hoping to Buy,
There are way too many people who think they should keep a house without paying for it. Some foreclosures have given 24 months of free rent or more. At what point is this anything but a subsidy from everyone else in society?
We used to only give welfare to people who didn’t own a house. Now we’ve jumped the fence and extended welfare to homeowners.
BDiego | October 28th, 2008 at 11:42 amFHA is just insuring the loan still held on the books by Countrywide.
Countrywide agrees to take a haircut and kick in the MIP and follow a few other guidelines in order to get this insured.
The hoops people have to jump through in order to qualify limits the effectiveness of this plan for most lenders. Borrowers get a pretty sweet deal though. We will being seeing more cases like this moving forward. It is just trying to relieve some pressure on the market but it won’t save the market from basic affordability issues.
® | October 28th, 2008 at 11:57 am“Borrowers get a pretty sweet deal though.”
No, they absolutely do not. The ‘deal’ makes no long term financial sense whatsoever if your other option is to walk away.
BDiego,
Unfortunately that would be correct. Lets set morals aside here and examine this. The savvy ones are going to be able to get 6-12+ months of free rent. So in return for a tarnished credit score, they get to live in a house they couldn’t afford for a few years at a teaser rate, then get a free year of rent when the loan adjusts.
During this year, if they are smart they save every penny they would be spending on rent (mortgage) that year and then rent for a year or two and save up even more money. Next thing you know, they are sitting on a large pile of cash for a down payment (1 year of free rent certainly helps) and the market has potentially corrected itself and they re-enter the market and purchase a house again for a much lower price with a much larger DP this time (hopefully thanks to new lending standards).
Pretty much sucks huh?
The good news is, I don’t think there are that many people out there smart enough to actually execute this – certainly not a majority. After all, 2+ million people were dumb enough to sign up for the HOPE program and if 1/3rd of them already fall out in the first 3 months…. And a large portion of the others HELOC’d and re-financed their way into recourse loans and can’t just walk away.
sdnerd | October 28th, 2008 at 1:13 pmI wrote to CA state tax advocate office a few weeks ago (forwarded the email to Gov. Arnold’s website too) and suggested they tax all those foreclosed homeowners on the earnings they get by living “rent-free”.
I got a call back the next day from the tax advocate office saying that was a good idea, not much more than that.
If you were to tax yearly earnings of $30,000 (for example $2,500 per month rent-free for 12 months) at the 9% rate….that’s a lot of revenue that CA could use right now. Assuming 500,000 households, that’s about $1.3B. What’s our defecit at right now–$10B? An easy 13% of the problem solved.
Is CA and/or the Fed already doing something like this? I know homeowners already have their remaining debt forgiven. Where’s the responsibility???
Thoughts on whether this will ever be implemented at a state or federal level? I’m surprised it hasn’t been done already.
emscuba | October 28th, 2008 at 9:44 pm