Don’t wait for home owner bailout provisions to trickle down from the $700 billion Emergency Economic Stabilization Act of 2008,” (H.R. 1424) recently rushed through Congress.

When it comes to help from new federal legislation for distressed home owners, the $300 billion “Housing and Economic Recovery Act of 2008″ (H.R. 3221), signed earlier this year, can provide more immediate relief.

The $300 billion recovery act has both a mandated mortgage modifying provision and a voluntary “Hope For Homeowners” (H4H) refinance program, for home owners who qualify.

President Bush signed the larger $700 billion stabilization act on Oct. 3, 2008, but it is, in-part, “stay tuned” legislation. Exactly how it will be implemented to help home owners — or the economy at large, for that matter — isn’t fully clear.

In part, the stabilization act calls for federal agencies holding mortgage and mortgage securities to identify loans that can be modified and work toward modifications. The stabilization act also allows the U.S. Secretary of the Treasury to use loan guarantees and credit enhancements to help home owners avoid foreclosures. And the stabilization deal calls for shoring up the H4H program. How any of those provisions will be implemented, however, is still under consideration.

Loan modifications

On the other hand, the older recovery act, signed in July came with one provision ready to go. It mandated that mortgage servicers modify loans for certain home owners to help them avoid foreclosure as long as three requirements are met:

 
1. A default on the mortgage either has already happened or is “reasonably foreseeable.” 
2. The home owner lives in the property as his or her primary residence. 
3. The lender is likely to recover more through the loan modification or workout than by forcing the home owner into foreclosure.

It’s up to the home owner to prove, in writing, his or her case to the lender. That could mean some back and forth negotiating, even legal wrangling. To that end, an accredited mortgage, banker and broker certifier, CMPS Institute, offers a sample letter (http://www.cmpsinstitute.org) containing more assistance, and tips to help home owners negotiate a loan modification.

The institute further advises:

1. Your hardship letter should demonstrate job loss, a serious health condition, an ensuing balloon payment, a coming adjustable rate reset or some other financial calamity that will preclude you from making your mortgage payments as scheduled.

2. Send the letter along with documented evidence — your financial statements, employment records, tax returns and bank statements and other evidence that demonstrates how you can afford a modified loan under your present financial circumstances. Also send the lender a current appraisal of your home or otherwise document the current value of your home.

3. Deal directly with a representative of the lender’s “loss mitigation” or workout department– not a broker, loan originator or other mortgage staffer.

FHA refinancing

Newly effective Oct. 1, 2008 a second provision of the recovery act allows troubled mortgage holders to avoid foreclosure by refinancing into smaller, more affordable, Federal Housing Administration (FHA)-backed mortgages, provided Uncle Sam gets a piece of the equity-growth action and provided the lender voluntarily agrees to the deal, which includes writing down or reducing loan balances.

U.S. Department of Housing and Urban Affairs’ (HUD) “Hope For Homeowners” fact sheets (http://www.hud.gov) spell out the details.

 

The refinanced, 30-year, fixed rated FHA mortgages in the H4H program are for home owner-occupants having difficulty making their payments. 

The existing mortgage must have been originated on or before January 1, 2008, and the owner must have made at least six payments. 

Banks can volunteer to write down an existing mortgage to 90 percent of the new appraised value of the home. To get the deal to fly, any holders of existing mortgage liens must release the liens and waive all prepayment penalties and late payment fees. The existing first mortgage holder has to accept the H4H loan as full settlement of all outstanding indebtedness. 

As of March 2008, the home owner’s total monthly mortgage payments due must be more than 31 percent of the household’s gross monthly income. 

The loan amount on the new H4H mortgage cannot exceed $550,440. The amount can include a financed 3 percent “Upfront Mortgage Insurance Premium” and other loan costs. The home owner must also pay a 1.5 percent annual mortgage insurance premium. 

The home owner cannot take out a second mortgage for the first five years of the new loan, except under certain emergency conditions. 

The borrower must agree to share equity with the FHA, both the equity created at the beginning of the new mortgage and future appreciation in the value of the home. If the home is sold or refinanced, the homeowner will share the equity with FHA on a sliding scale ranging from a 100 percent FHA share after the first year to a minimum of 50 percent after five years. The FHA will share a portion of its equity earnings, when available, with past lien holders until any available appreciation is exhausted. Any left over appreciation goes to the FHA on the sliding scale.

Written by Broderick Perkins

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