As I predicted last year, more legislation is flooding in. Two days ago on July 30, 2008, The President signed H.R. 3221, the American Housing Rescue and Foreclosure Prevention Act, which as near as I can tell, is also called the Housing and Economic Recovery Act of 2008.
The most interesting part of the bill for me is the claims that the bill:
"Expands the FHA program so many borrowers in danger of losing their home can refinance into lower-cost government-insured mortgages they can afford to repay.
· Protects taxpayers by requiring lenders and homeowners to take responsibility. This is not a bailout; in order to participate, lenders and mortgage investors must take significant losses by reducing the loan principal. In exchange for an FHA guarantee on the mortgage, borrowers must share any profit from the resale of a refinanced home with the government.
· Contains critical protections for taxpayers’ dollars, including higher refinancing fees that establish a new FHA reserve to cover possible losses from defaults on these government-backed mortgages.
· Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced."
In reading the summary, I learned that the FHA insured loan can be up to 90% of the present value of the home. I believe I read somewhere that the FHA loan limits are capped at $625,550.
While the bill obviously has good intentions, I find myself wondering how the logistics of such a "rescue" would work.
Hypothetically, Homeowner John & Jane Smith bought a house in Nov. 2006 in San Jose, California with a purchase price of $750,000.00. They did a 5/15/80, so they made a downpayment of $37,500.
Their two loans were $600k and $112,500, with the smaller of the two loans being a fixed and the larger loan having a low teaser rate that adjusted and a 2 year pre-payment penalty.
Now the house in August of 2008 is worth about $600,000.00, and the loans exceed the value of the house by $112k. How does the HOPE rescue work?
First, the Smiths have to be owner-occupants to qualify. Next, their lender has to agree to modify the loan. Well, there are 2 lenders, so this can be a logistical nightmare. The senior lender has $600k, and they are out at 100% LTV (loan-to-value).
The FHA loan that the Smiths would want to re-finance will go to 90% LTV, which means the FHA loan is capped at $540k. The senior lender has to take a $60k discount and waive its prepayment penalty, the junior lender has to agree to take a 100% discount.
How feasible is this rescue package? I have seen many short sales fall through because the junior lender will not take a discount. Occasionally, the senior will also refuse to waive the pre-payment penalty.
How successful will this new loan be for the homeowner? At $540k, with perhaps a 7% loan, 30 year fixed, fully amortized, the monthly payments would still be $3,600.
How motivated will the homeowner be to do this, when they know that they must share the future appreciation with the lender who discounted their loan?
If the homeowner walked away and took the one-time hit, they could be renting a house for $2500/mo. in San Jose. Which choice do you think the Smiths will make?