Government Solutions to Negative Equity

A host of government-insured programs have been unveiled to help borrowers with negative equity.

Previously, the Obama Administration announced that by the Fall it planned to make changes to the FHA program that would provide a refinance option for borrowers who are current on their monthly payments but owe more than their home is worth. In Mortgage Letter 2010-23 HUD sets forth the details regarding the refinance option. The option will be available for loans with case numbers issued on or after Sept. 7 and closed on or before Dec. 31, 2012.

Conditions.
The refinance option is available for homeowners with a non-FHA mortgage loan, if the following conditions are satisfied:

• The homeowner is in a negative equity position.

• The homeowner is current on the existing mortgage loan.

• The homeowner occupies the home as their primary residence and the home consists of one to four units.

• The homeowner must qualify under standard FHA underwriting requirements and have a “FICO based” decision credit score of at least 500.

• The existing first lien mortgage loan holder must write off at least 10 percent of the unpaid principal balance.

• The FHA refinance loan may have a maximum loan-to-value ratio of 97.75 percent.

• Subordinate mortgage loans that are not extinguished must be re-subordinated and the combined LTV with the FHA refinance loan may not exceed 115 percent.

• For loans that receive a “refer” risk classification from TOTAL Mortgage Scorecard or that are manually underwritten, the homeowner’s total monthly mortgage payment for the FHA refinance loan and any subordinate mortgage loans may not exceed 31 percent of the homeowner’s gross monthly income, and the total monthly debt payments of the homeowner may not exceed 50 percent of such income.

• Premium pricing may not be used to pay off existing debt obligations to qualify the homeowner for the FHA loan.

• The mortgagee may not make mortgage loan payments on behalf of the homeowner or otherwise bring the existing loan current to make the homeowner eligible for the refinance option.

• The existing mortgage loan holder may not have brought the existing loan current, other than through an acceptable permanent loan modification.

For a homeowner with a loan that was permanently modified under the Making Home Affordable Program, the FHA refinance loan may not close before the month that follows the month in which the modification became permanent. For a homeowner with a non-HAMP permanent modification, the homeowner must make at least three monthly payments on time and the modified loan must be current for the month due. If a homeowner is in a temporary or trial modification period, the homeowner is not eligible for an FHA refinance loan under the program.

Subordinate Loans
If any subordinate mortgage loan will remain after the refinance, the following conditions apply:

• The subordinate loan may not provide for a balloon payment before 10 years, except if the property is sold or refinanced.

• The homeowner must be permitted to prepay the loan without penalty after giving 30 days advance notice.

• Periodic payments, if any, must be collected monthly.

• Any required payments on the subordinate loan must be included in the qualifying ratios for the homeowner, unless payments are deferred for at least 36 months.

Incentives will be provided to subordinate mortgage loan holders who agree to a full or partial extinguishment of their loans. The amount of the incentive will be based on the CLTV of the existing loans, and HUD advises that the specific incentive schedule and more information will be available at www.hmpadmin.com. (The Web site includes Supplemental Directive 10-08.)

Supplemental Directive 10-08 provides that investors or servicers of eligible second lien loans may receive incentives under the program. Among other requirements, to be eligible a second lien loan must have been originated on or after January 1, 2009, may not be owned or guaranteed by Fannie Mae or Freddie Mac, and must have required the borrower to make a monthly payment. For second lien loans that were no more than 6 months past due at all times during the 12-month period before the FHA refinance loan closes, the investors will be entitled to receive payments based on the following schedule:

For second liens that were more than six months past due at any time during the 12-month period before the FHA refinance loan closes, the investors will be entitled to receive $0.06 per dollar of principal extinguished. Subject to conditions, the servicer of an eligible second lien loan that is partially or fully extinguished will be entitled to receive a one-time incentive of $500. Among other conditions, for a servicer to receive the incentive payment the second lien loan must have an unpaid principal balance of at least $2,500 and the servicer must have executed an Servicer Participation Agreement or Service Schedule to the agreement, as applicable.

The Supplemental Directive sets forth other eligibility requirements for incentive payments and addresses reporting and other requirements.

Certification
For loan applications dated on or after Sept. 19, the homeowner must provide a certification that addresses an eligibility requirement under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1481(d) of the Dodd-Frank Act does not permit a person to begin receiving assistance under any mortgage assistance program authorized or funded by the EESA if the person, in connection with a mortgage or real estate transaction, has been convicted within the last 10 years of any of the following: (1) felony larceny, theft, fraud, or forgery, (2) money laundering, or (3) tax evasion. HUD will provide further guidance on this requirement in a future Mortgagee Letter.

Homeowner Disclosures
Lenders will be required to advise homeowners seeking an FHA refinance loan under the program that (1) as with any loan forgiveness action, the short refinancing under the program may be reflected as a negative feature on the borrower’s credit score, and (2) the homeowner needs to consult with their tax advisor regarding the cancellation of debt and possible tax consequences.

Claim Process
Lenders will be required to submit separate claims to obtain insurance benefits because funds under the EESA will cover a portion of the total claim amount. HUD will provide further guidance on the claim submission requirements in a future Mortgagee Letter.

Lender Performance
The performance of FHA refinance loans made under the program will be analyzed by HUD separate from an FHA lender’s traditional FHA loan portfolio. In particular, FHA refinance loans originated in accordance with the program requirements will not be included in HUD’s performance analysis of a lender’s compare ratio under the Credit Watch Termination initiative.