House Financial Services Committee approves Housing Stabilization ActMortgagePress.comFederal Housing Administration Housing Stabilization and Homeowner Retention Act of 2008
The House Financial
Services Committee recently approved HR 5830, the Federal Housing Administration (FHA)
Housing Stabilization and Homeowner Retention Act of 2008, by a
bipartisan vote of 46 to 21. The legislation, authored by Committee
Chairman Rep. Barney Frank, will expand the FHA program to help
refinance at-risk borrowers into viable mortgages. The bill also
requires the Federal
Reserve Board to conduct a study on the need for an auction or
bulk refinancing mechanism. The legislation now moves to the full
House for consideration.
"It is important that we reduce the number of foreclosures, both
as a matter of alleviating the pain for some individuals and
stabilizing some neighborhoods. It is my hope that this legislation
will restore some stability to the housing market, put liquidity
back in the market, and not interfere with the market, but help
restore it," said Rep. Frank.
"Servicers should put a pause in some foreclosures until they
can wait to see exact details of this as it moves forward," Frank
continued. "If after this we continue to get very little
participation by servicers, I can guarantee you that the servicer
industry will look very different a year from now than they do
today. If after everything we do in this cooperative way falls
short, then you are going to see legislation that puts some very
real restrictions on the role of servicers and give[s] many more
rights to the borrowers."
Summary of HR 5830, as amended
This voluntary program would permit FHA to provide up to $300
billion in new guarantees to help refinance at-risk borrowers into
viable mortgages. This $300 billion is the total amount of
outstanding loans that may be insured under the program. The
government would only have liability if a borrower defaults and the
amount recovered in foreclosure is below the outstanding
principal.
In exchange for the acceptance of a substantial write-down of
principal, the existing lender or mortgage holder who chooses to
participate would receive a "short payment," which is a payment for
less than the outstanding balance as payment in full, from the
proceeds of a new FHA-guaranteed loan, if the new loan would have
terms that the borrower can reasonably be expected to pay and the
borrower agrees to share future home appreciation with the
government. In short, the program would provide refinancing
assistance to allow families to stay in their homes, protect
neighborhoods and help stabilize the housing market.
Under the program, a borrower or existing loan servicer of an
eligible loan would contact an FHA-approved lender who would
determine the size of a loan that would be consistent with the
requirements of the program and that the borrower could reasonably
repay. If the current lender or mortgage holder agrees to a
write-down that is sufficient to meet the requirements of the
program and make the new loan affordable, the FHA-lender will pay
off the discounted existing mortgage.
In addition to a first lien, the government will retain a share of
future home-price appreciation to help defray the government's
costs and prevent unjust enrichment, such as borrower flipping.
When the borrower sells the home or refinances the loan, the
borrower will pay, from any profits, the higher of: (1) an ongoing
exit fee equal to three percent of the original FHA loan balance;
or (2) a declining percentage of any net proceeds attributable to
home appreciation. For example, 100 percent in year one to 50
percent in year four and thereafter, minus the fees the borrower
has paid into FHA.
Eligibility requirements for existing
loans
All of the following are required for eligibility:
•Owner-occupied principal residences only—no
investors, speculators or second homes—and borrowers must
certify that they do not own any other homes;
•Existing senior loans being refinanced must have been
originated on or before Dec. 31, 2007;
•To remove any incentive for borrowers to purposely default,
the borrower must have had a mortgage debt-to-income ratio of no
less than 35 percent as of March 1, 2008, must certify that he has
not intentionally defaulted on existing mortgage(s) and did not
obtain the existing loan fraudulently;
•Participating mortgage holders/investors must waive any
penalties or fees on the existing mortgage and must accept proceeds
of the new loan as payment in full; and
•Existing mortgage holders/investors must accept their
losses, taking substantial write-downs sufficient to: (1) establish
a three percent loan loss reserve for the FHA; (2) pay the
origination and closing costs for the new loan up to two percent;
and (3) bring the loan-to-value ratio on the new FHA-guaranteed
loan down to no greater than 90 percent of the property's current
appraised value, resulting in a substantial reduction in debt
service to the borrower. Accordingly, to qualify, mortgage holders
would need to accept a substantial write-down, accepting as payment
in full no more than 85 percent of the property's current appraised
value.
Requirements for new FHA-insured loans
•New FHA loans must be properly underwritten and must be
based on current appraised value of the house and borrower's
documented income. Borrowers with higher, but not disqualifying
debt levels would need to make six months of timely payments at the
new payment level to qualify for the guarantee;
•New FHA loans must extinguish all existing liens and
substantially reduce the borrower's mortgage debt service;
•New FHA loans under this program must be within the FHA
loan limits now in effect under the stimulus for the duration of
this program;
•Oversight Board will set reasonable limits on loan fees and
interest rates; and
•To reduce costs to the government and avoid inappropriate
enrichment to the borrower, the government will retain a share of
the borrower's future profits. When the borrower sells the home or
refinances the loan, the borrower will pay, from any profits, the
higher of: (1) an ongoing exit fee equal to three percent of the
original FHA loan balance; or (2) a declining percentage of any net
proceeds attributable to home appreciation.
Oversight Board
The program will be overseen by a Refinance Program Oversight Board
consisting of the secretary of Treasury, the secretary of U.S. Department of Housing and Urban
Development (HUD), and chairman of the Federal Reserve.
Coordination of existing lien-holders
The Oversight Board will be authorized to take action to facilitate
coordination among different existing lien-holders, and shall be
empowered to establish a formula for compensating and a mechanism
for obtaining the voluntary waiver of all lien holders.
Separate FHA fund
To protect the FHA Mutual Mortgage Insurance Fund, these new loans
will exist in a separate fund in FHA and will be permitted to be
resold through Ginnie
Mae.
Improving FHA capacity
The Oversight Board will take actions, as necessary, to increase
FHA's capacity, including:
•Treasury, Federal Reserve and HUD may share employees to
improve FHA capacity;
•Contracting for the establishment of underwriting criteria,
pricing standards and other factors relating to eligibility;
•Contracting for independent quality reviews of the
underwriting of these mortgages; and
•Increasing HUD personnel.
Auction or bulk refinance study
The Federal Reserve Board will be required to conduct a study of
the need for, and efficacy of, an auction or bulk refinancing
mechanism and submit a report to Congress within 60 days of
enactment. In addition, it will include:
•Increased fraud prevention/oversight;
•Independent quality reviews will be established to determine
underwriter compliance, and rates of delinquency, claims and
losses;
•Monthly reports will be submitted to Congress; and
•An annual audit of the program will be conducted.
Sunset
The program will run for two years, with flexibility for
additional six-month extensions not to exceed two more years.
Authorization for foreclosure counseling and legal
aid
The bill would authorize $210 million for foreclosure counseling,
including to veterans recently returning from active duty in the
armed forces, with at least $30 million targeted to low-income and
minority homeowners and $35 million to assist with legal aid.
Office of Housing Counseling
The bill establishes, within HUD, an Office of Housing Counseling
that will conduct activities relating to homeownership and rental
housing counseling. The Office of Housing Counseling will:
•Require HUD to provide for the certification of various
computer software programs for consumers to use in evaluating
different residential mortgage loan proposals;
•Authorize appropriation not to exceed $3 million for
national public service multimedia campaigns for homeownership
counseling services for fiscal years 2008, 2009 and 2010;
•Require HUD to provide financial and technical assistance
to states, local governments and non-profit organization regarding
the establishment and operation of related educational programs,
and authorizes appropriation of $45 million for each of fiscal
years 2008 through 2011; and
•Direct HUD to study and report to Congress on the root
causes of the default and foreclosure of home loans.
Mortgage fraud
Appropriations of $31,250,000 are authorized to hire additional FBI agents and Department of Justice prosecutors
to combat mortgage fraud, and $750,000 to support FBI interagency
task forces in the areas with the 15 highest concentrations of
mortgage fraud.
VA loans
Conforming loan limits for Veterans
Administration loans are increased.
Appraisals
Enhanced appraisal standards and appraiser independence is
required.
For more information, visit www.financialservices.house.gov.
