More on the H4H Homeowners Rescue Plan, Pros & Cons

Here’s a followup to Mary Miller’s post on New Hope for Those in Trouble?  The Federal Government HOPE for Homeowners (H4H) is a program designed to assist borrowers at risk of default or foreclosure in refinancing to an affordable 30-year fixed rate FHA loan. The program is effective October 1, 2008 and will conclude on September 30, 2011.

Borrowers eligible if (among other factors):

• The home to be refinanced is a 1-unit primary residence, and the borrower has no ownership interest in any other residential real estate.
• The existing mortgage was originated on or before January 1, 2008, and the borrower has made at least 6 payments on it.
• Their monthly mortgage payments exceed 31% of their gross income as of March 31, 2008.
• They are unable to pay his/her existing mortgage(s) without help.
• They must certify that they have not been convicted of fraud in the past 10 years or intentionally defaulted on their debts, and that they did not willingly provide material false information to obtain their existing mortgage(s)

Borrowers may be current or delinquent on their existing mortgage(s).

• The loan amount may not exceed a nationwide maximum of $550,440
• The new mortgage will be no more than 90% of the new appraised value with the lender essentially writing down the current mortgage to that amount. 
• Upfront mortgage protection insurance [MIP] is 3% and the monthly MIP is 1.5%
• The holders of existing mortgage liens must waive all prepayment penalties and late payment fees.
• The existing first mortgage must accept the proceeds of the H4H loan as full settlement of all outstanding indebtedness.
• Existing subordinate lenders must release their outstanding mortgage liens.
• Standard FHA policy regarding closing costs applies, and they may be 1) financed into the new loan provided the LTV does not exceed 90% including Upfront Mortgage Insurance Premium [UFMIP], 2) paid from the borrowers own assets, 3) paid by the servicing lender or third party (e.g., Federal, state, or local program), or 4)  may be paid by the originating lender through premium pricing.
• The borrower must agree to share both the equity created at the beginning of this new mortgage and a portion of any future appreciation in the value of the home.
• You will give up 50% of all home appreciation to the Federal Government
• You will also share the equity on the 10% discount on a year over year sliding scale. Remember this plan is pricing the loan at 90% of home appraisal. For example, a $200K home is refinanced at $180K. The equity share looks like this:
• During Year 1, if you sell for $200K, the FHA gets 100% of the $20K
• During Year 2, if you sell for $200K, the FHA gets 90% of the $20K
• During Year 3, if you sell for $200K, the FHA gets 80% of the $20K
• During Year 4, if you sell for $200K, the FHA gets 70% of the $20K
• During Year 5, if you sell for $200K, the FHA gets 60% of the $20K
• After Year 5, if you sell for $200K, the FHA gets 50% of the $20K
• The borrower cannot take out a second mortgage for the first five years of the loan, except under certain circumstances for emergency repairs.

Pros

This plan can help some people in real need.  I’ll let others comment on the economics of this.

Cons

Again, the economics/free capital markets discussion aside, I’m concerned that some people will try and take advantage of this plan.  One of the apparent debate points is that the plan does not take assets into account.  A couple who had just bought a Ferrrari and a sailboat could get into this plan if their house meets the criteria.   Does that seem fair?

Plus, this plan won’t help anyone who saw their home value go from $800K to $575K — you are above the limit for this plan.  Some Californians are no doubt feeling this pinch. 

Final Thoughts

Older couples with strong asset bases and small incomes may find this plan attractive. Remember, there is at least one rub in this.  You are going to agree to share the equity created once your home price starts to move up.  Perhaps, they think they are in a market that is not going to go up for a long time.  

As the other MU authors have stated, many lenders may choose to do custom “workouts” instead of participating in the H4H program, as they want to avoid write-downs.   I haven’t seen any participation numbers yet for H4H, nor have I seen any stats on participation in non-FHA custom workouts.