HOUSING AND ECONOMIC RECOVERY ACT OF 2008

On July 30, President Bush signed the Housing and Economic Recovery Act of 2008. The law enables mortgage lenders to participate in a new Federal Housing Administration (FHA) program that allows “at risk” borrowers to refinance their current mortgage into a new fixed-rate loan insured by the FHA. However, lenders’ participation in the program is voluntary.

The legislation becomes effective on October 1, 2008.

Homeowners must meet several criteria to qualify for this program. They include:

• They must own and currently live in the home and may not own any other residential property.
  
• The existing mortgage must have been originated prior to January 2008.
  
• Borrowers who are current on their mortgage payments, as well as those in default, may be eligible for the program. However, all borrowers must spend at least 31% of gross monthly income on mortgage debt and must be unable to afford payments on that mortgage (qualifying criterion and documentation for this provision have not yet been developed).
  
• The HOPE loan will be a 30 year fixed rate mortgage and may not exceed 90% of the current appraised value of the property. An additional 3% mortgage insurance premium will be financed in the mortgage making the initial loan to value 87%.
  
• All first and subordinate mortgages, including home equity loans, must be either paid off by the borrower or paid in full from the proceeds of the new HOPE loan.
  

Many homeowners will not have the funds available to pay off a home equity loan or other subordinate liens, or to pay down the first mortgage to 87% of current appraised value.

This means that, in just about every case, the mortgage servicer and the company that holds the home equity loan must agree to forgive much of the debt.

Homeowners also need to understand there are costs associated with the new program. In addition to loan origination fees determined by the lender, borrowers are responsible for paying an insurance premium to the FHA equaling 1.5 percent of the principal annually.

Finally, if a homeowner is eligible for the new FHA program and receives an offer from their lender, they must understand the following conditions apply:

• The borrower must agree to share both initial equity and future appreciation with The U.S. Housing and Urban Development Department.
  
• The equity sharing agreement will state that if the house is sold within the first year, 100 percent of the initial equity (generally 10% of the value of the property at origination) will go to FHA. After 1 year, FHA is entitled to 90 percent of the initial equity. The percentage keeps dropping in 10 percent increments to 50 percent after the fifth year, where it stays.
  
• In addition to the initial equity which is a fixed amount, 50% of any future appreciation of the property must be paid to HUD when the property is sold.

Note:  Homeowners who do not qualify for the new program may still seek help to avoid foreclosure by calling Consumer Credit Counseling Service of Nebraska, Inc. and ask to speak with a counselor.  Our housing counselors are available at 402-333-8609 Ext. 319 or 1-800-881-2227.