Loan Modifications - The Failure of the Hope For Homeowners Program

The Bush Administration put in place two Federalfourth year, HUD would get 70% or $14,000. If it was
Housing Administration programs which wererefinanced or sold in the fifth year, HUD would get
supposed to help people facing foreclosure save their60% or $12,000. If it was refinanced or sold after the
homes.fifth year, HUD would get 50% or $10,000.
The first was the FHA Secure Program. This was inOn top of the Equity Sharing Provision there is an
effect from September 5, 2007 through December 31,Appreciation Sharing Provision. This stated that the
2008. The program failed. It never helped the people itperson getting the loan had to share 50% of any
was intended to. Only 4,000 out of about 400,000increase in value of the property when the property
loans were refinanced.was sold or disposed of. This was the difference
The second program is the Hope For Homeownersbetween the value of the property at the time of sale
Program. This program is also supposed to certainor disposition and the appraised value at the time the
people facing foreclosure to save their homes byloan was taken out. Excluded from the appreciation
refinancing into FHA mortgages. These would havewould be any closing costs and the cost for
lower interest rates and lower monthly paymentsimprovements to the property.
which these people would be able to make.The equity and appreciation sharing provisions were
The Hope For Homeowners program went into effectvery discouraging. Most people facing foreclosure
on October 1, 2008 and runs until September 30, 2011.would look at how much it was going to cost them to
Anyone with a loan taken out prior to January 1, 2008get a loan under the Hope For Homeowners Program
who is facing foreclosure can apply to refinance underand decide that they were not much better off than
this program.they were in their current situation.
The FHA anticipated that 400,000 people either facingLenders disliked the Hope For Homeowners Program
foreclosure or struggling to make their monthlytoo. The main reason is that they stood to lose a lot of
payments would be able to save their homes throughmoney because of the program.
this program. The program was poorly written. BothThe program said that the maximum amount for a
people facing foreclosure and their lenders disliked theloan under the program would be for 90% of the
program.current value of the home. That money would be paid
What were the reasons people facing foreclosureto the current lender. That lender would have to write
disliked the program?off the difference between that and what the person
With a regular FHA loan people have to pay forfacing foreclosure owed on their loan.
mortgage insurance. At the start the amount of theLooking at this more closely. As an example we have
loan is increased by either 1.50% or 1.75% to cover thebeen using a home with a current value of $200,000
upfront insurance. On a $200,000 loan, at 1.50% theand a loan under the Hope For Homeowners program
amount owed becomes $203,000. At 1.75% theof $180,000. Say the property has depreciated 25% in
amount owed becomes $203,500.value in the last year. It had been worth $266,000. The
In the Hope For Homeowners Program the upfrontcurrent balance on the loan is $240,000. The lender
insurance is 3.0%. That would increase the $200,000would have to waive its right to collect the $60,000
loan to $206,000. Any person getting this loandifference between the balance of the current loan
automatically loses more of the equity they have inand the new one of $180,000.
their home than they normally would with a traditionalIf there is a second loan on a home, the lender there
FHA loan.comes out worse. They have to release their lien on
On a normal FHA loan there is monthly insurance. Thethe property and accept whatever they are offered
charge for this is 0.50% each month. On the $203,000as payment in full on their loan.
loan, the charge for this insurance is $84.58 monthly.Going back to the example we have been using. Say
In the Hope For Homeowners Program the monthlythe property a year ago was worth $266,000. Instead
insurance is1.50%. On the $206,000 loan the monthlyof one loan with a balance of $240,000, the balance
payment for the insurance is $257.50.on the first loan is $220,000. There is a balance of
It is assumed that the reason FHA increased the cost$20,000 on a second loan. When the home was
for the upfront and monthly insurance is simple. Peoplepurchased, this second loan was for $21,500. The
facing foreclosure are poorer risks. There would be a$180,000 from the new FHA loan would go to the
higher percentage of these people going back intolender on the first loan. The lender on the second loan
foreclosure. Therefore the premiums for the insurancewould get nothing.
had to be increased to cover the risk.The program provides that lenders on second loans
The Hope For Homeowners Program also containedwould be offered a share in future appreciation.
equity and appreciation sharing provisions.However, this would never be enough to cover the
The Equity Sharing provision stipulated that at the timeloss they would incur.
the loan was being originated, the property would beThe only ones who seem to benefit from the Hope
appraised. The person facing foreclosure would shareFor Homeowners Program as it was originally drafted
with the Department of Housing and Urbanare FHA and HUD. People facing foreclosure lose. In
Development (HUD) a portion of the initial equity. If theaddition their lenders are big losers too.
value was $200,000 and the loan was for 90% of thatThus far the Hope For Homeowners program has
or $180,000, there would be $20,000 in equity in thebeen a disaster. Only one person facing foreclosure
home.has refinanced their loan through the program. 51 more
If the person refinanced the loan or sold the homeare being processed. Remember - when the program
within the first year, HUD would get 100% of thewas announced, FHA anticipated that it would help
$20,000. If it was refinanced or sold in the second400,000 people.
year, HUD would get 90% or $18,000. If it wasRevisions to the program are being made. Perhaps
refinanced or sold in the third year, HUD would getthese will help it become a program to help people
80% or $16,000. If it was refinanced or sold in thesave their homes.