FHA Loan Expert Blog

October 20, 2008
MORTGAGEE LETTER 2008-33
TO:    ALL APPROVED MORTGAGEES
          ALL HUD-APPROVED HOUSING COUNSELING AGENCIES
SUBJECT: Home Equity Conversion Mortgage (HECM) for Purchase Program
 The Housing and Economic Recovery Act of 2008 (HERA) provides HECM mortgagors with the opportunity to purchase a new principal residence with HECM loan proceeds.  Section 2122(a)(9) of HERA amends section 255 of the National Housing Act to authorize the Department of Housing and Urban Development (HUD) to insure HECMs used for the purchase of a 1- to 4-family dwelling unit.   Accordingly, eligible mortgagors now have the opportunity to purchase a principal residence with HECM loan proceeds.  HECM for purchase transactions, for which the FHA case number is assigned on or after January 1, 2009, must satisfy existing program requirements and the provisions of this Mortgagee Letter.

 The Federal Housing Administration (FHA) defines “HECM for Purchase” as a real estate purchase where title to the property is transferred to the HECM mortgagor, which the mortgagor will occupy as a principal residence, and, at the time of closing, the HECM first and second liens will be the only liens against the property.  HECM mortgagors must occupy the property within 60 days from the date of closing.  Lenders are required to ensure all outstanding or unpaid obligations incurred by the prospective mortgagor, in connection with the HECM transaction, are satisfied at closing. 

Eligible Property Types

 Only properties where construction is completed, as defined in Mortgagee Letter 2007-06, are eligible for FHA insurance under the HECM for Purchase program.  Loan proceeds may be used to satisfy outstanding payment obligations associated with a land contract, contract for deed or other similar purchasing arrangements that will ensure the property, which will be used as collateral for the HECM, meets FHA’s title requirements.  Those requirements, as provided in section 255(b)(4) of the National Housing Act and implemented in the HECM regulations at 24 CFR 206.45, provide, in part, that the HECM must be on real estate held in fee simple, or on a leasehold under a lease for not less than 99 years which is renewable, or under a lease having a remaining period of not less than 50 years beyond the date of the 100th birthday of the youngest mortgagor.  
Ineligible Property Types

 The following property types are ineligible for FHA insurance under the HECM for Purchase program:

• Cooperative units; 
• Newly constructed principal residence where a Certificate of Occupancy or its equivalent has not been issued by the appropriate local authority;
• Boarding houses;
• Bed and breakfast establishments;
• Existing manufactured homes built before June 15, 1976; and
• Existing manufactured homes built after June 15, 1976 that fail to conform to the Manufactured Home Construction Safety Standards, as evidenced by affixed certification labels (e.g. data plate and HUD certification label) and/or lack a permanent foundation as required in HUD’s Permanent Foundations for Manufactured Housing Guide.

Property Flipping

Prospective mortgagors should be alert to efforts to coerce them into obtaining a reverse mortgage as part of a purchase contractual obligation, or purchasing a distressed home in need of substantial repairs but being sold at or above market rate.

 As such, HECM lenders must take steps to ensure that: a) only current owners of record may sell properties that will be financed using FHA-insured mortgages; b) any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and c) for resales that occur between 91 and 180 days where the new sales price exceeds 100% of the previous sales price, FHA will require additional documentation validating the property’s value.  Lenders providing HECM financing for purchase transactions must comply with guidance provided in Mortgagee Letter 2006-14.
 
Refinancing and Existing Upfront Mortgage Insurance Premium (MIP)

 The HECM refinance authority is only applicable when the property that serves as collateral for FHA-insurance remains the same.  Therefore, existing HECM mortgagors who participate in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and lenders must enter the transaction into FHA Connection as a new HECM.

Monetary Investment

 Consistent with existing policy, the maximum claim amount and principal limit will continue to be calculated in accordance HECM regulations at 24 CFR 206.3, HUD Handbook 4235.1 REV-1, and applicable MLs.  At closing, HECM mortgagors must provide a monetary investment which will be applied to satisfy the difference between the HECM principal limit and the sales price for the property, plus any HECM loan related fees that are not financed or offset by other allowable FHA funding sources.
HECM mortgagors may choose to provide a larger investment amount in order to retain a portion of the available HECM proceeds for future draws.
Required Investment Examples

Example #1 Example #2 Example #3
Appraised Value/MCA*$300,000
Sales price                      $300,000 Appraised Value/MCA*$300,000
Sales price                     $325,000 Appraised Value/MCA*$300,000
Sales price                      $280,000
Principal Limit**           $199,500 Principal Limit**          $199,500 Principal Limit**           $199,500
Minus Loan Fees             $ 15,500 Minus Loan Fees            $  15,500 Minus Loan Fees             $  15,500
Avail. HECM proceeds  $184,000 Avail. HECM proceeds  $184,000 Avail. HECM proceeds   $184,000
Req. Investment              $116,000 Req. Investment              $141,000 Req. Investment                $ 96,000
* Appraised Value/MCA is defined as the maximum claim amount and is used to determine the principal limit which is the lesser of the appraised value or the FHA national mortgage limit.  The principal limit is the maximum amount available to the HECM mortgagor.
** Assumes the age of the youngest HECM mortgagor is 67 and a principal limit factor of .665 for a 5% expected average mortgage interest rate. 

In each example above, loan fees are deducted from the principal limit of the HECM.  However, it is not required that loan fees be deducted from HECM proceeds.  The mortgagor may pay loan fees as part of the required monetary investment and use all HECM proceeds toward the purchase transaction.

Funding Sources

HECM mortgagors must use cash on hand or cash from the sale or liquidation of the mortgagor’s assets for the required monetary investment.
  
Verification of Funding Sources

Lenders will be required to verify the source of all funds prior to closing.  A verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts.  If there is a large increase in an account, or the account was opened recently, the lender must obtain a credible explanation of the source of those funds.  Such documentation must be provided in the FHA case binder.  Failure to provide the necessary documentation may result in a notice of rejection and delay of endorsement. 

Gap Financing

 Consistent with existing regulatory requirements at 24 CFR 206.32(a), HECM mortgagors may not obtain a bridge loan (also known as “gap financing”) or engage in other interim financing methods to meet the monetary investment requirement or payment of closing costs needed to complete the purchase transaction.  This restriction includes subordinate liens, personal loans, cash withdrawals from credit cards, seller financing and any other lending commitment that cannot be satisfied at closing. 
 

Gap Financing Example

A prospective HECM mortgagor completes the required reverse mortgage counseling and receives an estimate stating the required monetary investment could be $25,000.  The prospective HECM mortgagor has $20,000 in liquid assets but is short the remaining $5,000.  The prospective HECM mortgagor cannot take $5,000 from a credit card or obtain interim financing in order to deposit the money into their banking account in anticipation of being required to bring this amount to closing.  However, the prospective HECM mortgagor may obtain the $5,000 from an allowable FHA funding source. 

Enhanced Counseling

 HUD-approved housing counseling agencies that have been approved to provide reverse mortgage counseling, must counsel those who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.

Right of Rescission

 The three-day right of rescission period is not applicable to HECM for Purchase transactions.  Therefore, all initial advances may be disbursed on the day of closing by the settlement agent.  However, FHA encourages lenders to seek their counsel’s opinion to assure compliance with Federal or State laws.

Closing Guidance

 Lenders are required to ensure the property, when used as collateral for the HECM, meets the following property requirements:

• Will serve as the principal residence of the HECM mortgagor.
• Construction is complete and a certificate of occupancy or its equivalent has been issued.
• Any construction loan financing for the property, which will serve as the collateral for the HECM loan, is satisfied and the HECM liens will be in a first and second lien position and, at the time of closing, no other liens against the property exist.

 Consistent with existing lending practices, lenders are responsible for determining whether a particular HECM loan is open or closed-end credit.  In accordance with 24 CFR 206.43, lenders must comply with the regulatory disclosure requirements.

Data Entry

 Instructions on how to enter HECM for Purchase transactions into FHA Connection and Insurance Accounting Collection System will be provided in a separate instruction.
 

Information Collection Requirements

The information collection requirements contained in this Mortgagee Letter were approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).  Approval of HECM Program is covered by OMB control number
2502-0524, with disclosures requirements being covered by OMB control numbers 2502-0265 and 2502-0059.  An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a valid control number.

 If you have questions regarding this Mortgagee Letter, please call FHA’s Resource Center at
1-800-CALL-FHA (1-800-225-5342).  Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).

       Sincerely,
       Brian D. Montgomery
       Assistant Secretary for Housing-
          Federal Housing Commissioner

Click Here: Contact Paul’s Short Sale Team

PDF Version: Mortgagee Letter Hope For Homeowners

The amount of the H4H mortgage may not exceed a nationwide maximum mortgage limit of $550,440.  The LTV of the H4H mortgage is limited to 90 percent of current appraised value of the property, including the UFMIP.  The proceeds from the new H4H mortgage will be applied to the existing senior mortgage, and extinguish all mortgage-related debts under all existing mortgages including: 
 
• Advances by existing lenders/servicers for taxes, hazard insurance and/or mortgage insurance; and

• Out of pocket third party legal expenses of the existing lenders/servicers associated with foreclosures and preservation and protection (See Mortgagee Letters 2007-03 and 2005-30)

PDF Version: Hope For Homeowners Mortgagee Letter 

Appraisals

The appraisal for the H4H mortgage must be performed by an appraiser on the FHA Appraiser Roster and conducted using FHA guidelines, which can be found in the Resources box at hud.gov/groups/appraisers.cfm. 

However, the appraisal must have been specifically ordered for the H4H transaction and the appraisal should be no more than 3 months old at the time of loan closing.  If an appraisal is more than 3 months old because of transactional delays, the appraisal may be acceptable with an explanation that addresses how the appraisal meets existing FHA standards and the requirement for “current” appraised value. The lender may require a new appraisal, if the appraisal and written explanation are insufficient.

Prevailing Appraised Value

If an appraisal is ordered by the current lender or servicer and a new appraisal is ordered by a different lender that will originate the new loan under this Program, the value provided in the appraisal ordered by the new lender will prevail as the appraisal accepted for obtaining FHA insurance.

Appraisal Practices in Declining Markets
 
 It is expected that many of the properties financed under this Program will be located in declining market areas.  Therefore, the following guidance is provided to assist lenders in ensuring that appraisers are providing accurate property valuations.  A declining market could be as small as a neighborhood or as large as an entire state, and no standard definition exists, other than a market in which home prices are falling. 

Appraiser Responsibilities

The purpose of the appraisal is to provide the lender/client with an accurate, and adequately supported, opinion of market value.  It is the appraiser’s responsibility in performing the appraisal to determine whether a property is located in a declining market.
The neighborhood section of each property specific appraisal form contains a subsection on housing trends where the appraiser must mark a box indicating whether property values are increasing, stable or declining.  Whichever box is selected, the appraiser is certifying that he or she has performed an objective analysis of quantifiable data supporting the observations made.

The appraiser must provide an explanation in the “Market Conditions” section of the appraisal report that includes relevant information in support of the conclusions about appraised value relating to trends in property values, demand/supply and marketing time.  The appraiser must also provide a description of the prevalence and impact of sales and financing concessions and/or down payment assistance in the subject’s market area.  Other areas of discussion may include days on market, list-to-sale price ratios, and/or financing availability.
 
Appraisers and lenders are reminded that a comparable sale should not be more than six months old and should represent a closed sale. The appraiser may utilize comparables that are more than six months old but only with a clear explanation and justification.  The lender may require a new appraisal, if the appraisal and written explanation are insufficient. The appraiser is not permitted to use a comparable greater than 12 months old (see Comparable Selection, page D-6 of Valuation Protocol).

Lender Responsibilities

The lender’s responsibility is to properly review the appraisal and determine that the appraised value used to support the loan amount of the new FHA-insured mortgage is accurate and adequately supported.  Lenders may determine, through services such as the S&P/Case-Schiller Index, Office of Federal Housing Enterprise Oversight (OFHEO) House Price Index or any index developed by its successor, the Federal Housing Finance Agency, or National Association of Realtors (NAR) statistics, that the appraised value is supportable.

Lenders are reminded that, if the appraiser they select provides a poor or fraudulent appraisal that leads FHA to insure a mortgage at an inflated amount, the lender is held equally responsible with the appraiser for the violation if the lender knew or should have known of the defects or the fraud in the appraisal.  FHA will pursue appropriate enforcement actions against both or either party.  Lenders accept responsibility, equally with appraisers for the integrity, accuracy and thoroughness of the appraisal submitted to FHA for mortgage insurance purposes.

Lenders should inform appraisers that the purpose of the appraisal is for the H4H Program, advising them that a copy will be shared with subordinate lien holders and must be provided to the borrower.

PDF Version: Hope For Homeowners Mortgagee Letter

Property Eligibilty

• The property must be the borrower’s primary and only residence in which they have an ownership interest (if there are non-occupant co-borrowers, they will need to quit claim their interest in the property prior to the occupying co-borrowers applying for the H4H Program);

• Only 1 unit properties are eligible, including condominium units, cooperative units and manufactured housing permanently affixed to realty.

PDF Version: Hope For Homeowners Mortgagee Letter

Mortgage Eligibility

• The mortgage being refinanced must have been originated on or before January 1, 2008;

• Each holder of an existing senior mortgage being refinanced must:

1. Waive all prepayment penalties and late payment fees (including insufficient funds fees) on the mortgage.  Prepayment penalties are defined in the Federal Reserve Board’s Regulation Z (Truth in Lending), 12 CFR 226.32(d)(6);

2. Agree to accept the proceeds of the new H4H mortgage as payment in full, and

3. Release their outstanding mortgage liens.

• Each holder of an existing subordinate mortgage must:

1. Waive all prepayment penalties and late payment fees (including insufficient funds fees) on the mortgage.  Prepayment penalties are defined in the Federal Reserve Board’s Regulation Z (Truth in Lending), 12 CFR 226.32(d)(6); and

2.  Release their outstanding mortgage liens.

• Any type of mortgage is eligible for refinancing under the H4H Program, including conventional (prime, Alt-A, subprime) or government-backed (FHA, VA, or Rural Development), fixed-rate or an adjustable rate mortgage; and

• The mortgage being refinanced may have a variety of payment characteristics, including interest only, payment option, negative amortization and/or any other exotic features.

PDF Version: Mortgagee Letter for Hope For Homeowners

 Borrower Eligibility

• Borrowers who are current or delinquent  on their mortgage at the time of the refinance are eligible for this Program, if they:   

o Have not intentionally defaulted on their mortgage or any other debt (Intentionally defaulted means the borrower had available funds that could pay the mortgage and other debts without hardship.  Debts subject to a documented bona fide dispute may be excluded.) AND

o Have made a minimum of six (6) full payments during the life of the existing senior mortgage (full payment is defined as what was acceptable to the lender for meeting the monthly payment obligation under the terms and conditions of the mortgage).

• Borrowers must reside in the property securing the loan being refinanced, and may not have an ownership interest in other residential real estate, including second homes and/or rental properties.

• Borrowers cannot have been convicted of fraud under state and Federal laws in the last 10 years. 
o Similar to its validation tool for social security numbers, FHA will use an automated tool at the time of case number assignment that will check the borrower’s name against several databases for convictions of fraud and an ownership interest in other residential properties.  In the event that the lender receives a warning at case number assignment and believes it is in error, it must provide evidence to the appropriate Homeownership Center documenting that the borrower has not been convicted of fraud or does not have an ownership interest in other residential properties.  Once the Homeownership Center evaluates the documentation, it will determine whether to lift the warning.

• Borrowers must certify that they did not knowingly or willfully provide material false information to obtain the existing mortgages being refinanced under the H4H Program.

• As of March 1, 2008, the borrower’s aggregate total monthly mortgage payment debt-to-income ratio (DTI) on all existing mortgages must be greater than 31 percent of the borrower’s gross monthly income. The total monthly mortgage payment is defined as the fully-indexed and fully-amortized Principal, Interest, Taxes and Insurance (PITI) payment (this includes principal and interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens).

FHA recognizes that reconstructing the borrower’s prior total monthly mortgage payment DTI as of March 1, 2008 may be difficult, especially as the H4H Program nears its sunset date.  To comply with this eligibility requirement, lenders must obtain:

1. From the borrower, evidence that the prior mortgage DTI was more than 31 percent on March 1, 2008, such as pay stubs for March 2008, or a signed and dated copy of the individual 2008 Federal tax return, when available, to determine gross monthly income for that month (earnings divided by 12), or W-2s, financial records, or verification of employment from the borrower’s employer. 

Lenders may also rely on the borrower’s signed and dated 2007 Federal tax return if the lender has no reason to believe that the borrower’s income in March 2008 was materially different than the income reported on the 2007 Federal tax return.

• To determine March 2008 income for self-employed borrowers, obtain a copy of the quarterly tax return that contains income stream information for March 2008 or a signed and dated Profit and Loss Statement and balance sheet that contains income stream information for March 2008 or a signed and dated copy of the individual 2008 Federal tax return, when available, (earnings divided by 12).

2. From the servicer of the mortgage, the borrower’s total monthly mortgage payment due for March 2008, including any amounts due on subordinate liens.
 
• For mortgages without escrow accounts, the lender should obtain tax and insurance information from the borrower.  If the borrower does not provide insurance information, then the servicer of the mortgage should estimate the monthly cost of hazard insurance (and flood insurance, if applicable) based on the property’s location and the rates in effect for 2008.  If the borrower does not provide real estate tax information, the lender should obtain it from public records.

I was contemplating the relative importance of the much anticipated FHA short refinance program recently when a friend of mine mentioned the FHA short refinance program in more detail.  This made me wonder whether the FHA refi program would be available for all Federal Housing Administration (FHA) borrowers desiring to refinance or whether this would be another public relations move for political gain.  As a result of this quandry, I decided to study the FHA short refinance in more detail.

FHA is the federal housing adminstration and is the governments vehicle for lending mortgage money for refinances and for purchase transactions.  The short refers to a type of FHA refinance that is short funds or too short to pay off the entire loan.  There are a few problems with the FHA short refinance program and the most notable is the fact that the FHA short refinance program requires the lender to accept a short payoff.

Most lenders prefer to get the entire payoff amount and do not want to be short any funds.  This in essence makes the FHA short refinance program more political talk and less reality for most fha borrowers desiring to refinance through the FHA short refi.

We will revisit the FHA short refinance program at a later date.

September 19, 2008

MORTGAGEE LETTER 2008-25

TO: ALL APPROVED MORTGAGEES

SUBJECT: Converting Existing Homes to Rentals—Underwriting Instructions

Through this Mortgagee Letter, the Federal Housing Administration (FHA) takes steps to immediately respond to an unscrupulous practice arising in the housing mortgage market that poses a risk to FHA, FHA-approved lenders, and consequently to FHA’s ability to help new homeowners.

Recently, FHA and others in the mortgage industry have observed an increasing number of homeowners who have chosen to vacate their existing principal residence and purchase a new residence. This has been occurring as some homeowners, given the rising price of fuel, are relocating to homes nearer their employment, or are taking advantage of other home buying opportunities arising in the marketplace.

Due to FHA’s concern that some homebuyers in these transactions may attempt to provide misleading information regarding the rental income of the property being vacated to qualify for the new mortgage, FHA is instituting underwriting guidance designed to assure that the homebuyer can make payments on the full debt service of both mortgages. Consequently, beginning with case number assignments on or after the date of this Mortgagee Letter and until further notice, the underwriting analysis may not consider any rental income from the property being vacated except under circumstances described in this Mortgagee Letter. The exclusion of rental income from property being vacated is being instituted on a temporary basis while FHA further analyzes this situation to determine whether permanent measures may need to be taken. This will assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage on the property being vacated. In either case, this guidance is directed to preventing the practice known as “buy and bail” where the homebuyer purchases, for example, a more affordable dwelling with the intention to cease making payments on the previous mortgage. Although the property being vacated will not have a mortgage insured by FHA, surrounding properties may and, thus, FHA may be indirectly negatively affected should that property result in a foreclosure.

Exceptions:

Rental income on the property being vacated, reduced by the appropriate vacancy factor as determined by the jurisdictional FHA Homeownership Center (see hud.gov/offices/hsg/sfh/ref/sfh2-21u.cfm) may be considered in the underwriting analysis under the following circumstances:

· Relocations: The homebuyer is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance. A properly executed lease agreement (i.e., a lease signed by the homebuyer and the lessee) of at least one year’s duration after the loan is closed is required. FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence the first month’s rent was paid to the homeowner.

· Sufficient Equity in Vacated Property: The homebuyer has a loan-to-value ratio of 75 percent or less, as determined by either a current (no more than six months old) residential appraisal or by comparing the unpaid principal balance to the original sales price of the property. The appraisal, in addition to using forms Fannie Mae1004/Freddie Mac 70, may be an exterior-only appraisal using form Fannie Mae/Freddie Mac 2055, and for condominium units, form Fannie Mae1075/Freddie Mac 466.

The guidance in this Mortgagee Letter applies solely to a principal residence being vacated in favor of another principal residence. This Mortgagee Letter is not applicable to existing rental properties disclosed on the loan application and confirmed by tax returns (Schedule E of form IRS 1040).

It is important to note that if the property being vacated had a mortgage insured by FHA, eligibility for a second FHA insured mortgage can only occur under the exemptions described in handbook HUD-4155.1 REV-5, paragraph 1-2.

If you have any questions regarding this Mortgagee Letter, call 1-800-CALLFHA.

Sincerely,

Brian D. Montgomery
Assistant Secretary for Housing-
Federal Housing Commissioner

Q:  How will the law help struggling homeowners keep their homes?

A:  Through the Federal Housing Administration (FHA), an estimated 400,000 borrowers in danger of losing their homes will be able to refinance into more affordable government-insured mortgages.  The program offers government insurance to lenders who voluntarily reduce mortgages for at-risk homeowners to at least 90% of the property’s current value. 

Q:  When will the program begin?

A:  The program will begin on October 1, 2008 and sunset on September 30, 2011.  Homeowners in danger of losing their homes before October 1, however, should not wait to contact their loan servicers and should begin applying for federally insured mortgages now.

Q:  Who is eligible?

A:  To be eligible to participate in this program, a borrower must:

• Have a loan on an owner-occupied principal residence.  Investors, speculators, or borrowers who own second homes cannot participate in this program.
• Have a monthly mortgage payment greater than at least 31 percent of the borrower’s total monthly income, as of March 1, 2008.
• Certify that he or she has not intentionally defaulted on an existing mortgage, and did not obtain the existing loan fraudulently.
• Not have been convicted of fraud.

Q:  How can a homeowner access this new program?

A:  Homeowners or a servicer of an existing eligible loan need to contact an FHA-approved lender.  The FHA-approved lender will determine the size of a loan that a borrower can reasonably repay and that meets the requirements of the program.  If the current lender or mortgage holder agrees to write-down the amount of the existing mortgage and make the new loan affordable, the FHA lender will pay off the discounted existing mortgage.  Loans provided under this program must be 30-year fixed rate loans.

Q:  Are lenders required to participate in this program?

A:  No.  The program is completely voluntary for lenders, investors, loan servicers, and borrowers.

Q:  How does this law help neighborhoods that have been hit by the foreclosure crisis?

A:  The impact of the current crisis has not been isolated to individual borrowers or investors, but has been felt broadly by neighbors, communities, and governments across the nation.  The law strengthens neighborhoods hit hardest by the foreclosure crisis by providing $3.9 billion in Community Development Block Grants to states and localities to buy foreclosed homes standing empty, rehabilitate foreclosed properties, and stabilize the housing market. 

Q:  Will this law be a bailout for speculators, homeowners, investors, and lenders?

A:  No. It is narrowly tailored to keep families in their homes.  For example:

Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.

Investors and lenders must take big losses first in order even to participate.  The owner of the old mortgage can get a maximum of 90% of the current value of the home (which presumably will be considerably less than the value of the original loan).  In many cases the loss will be significantly greater, but 10% is the minimum. 

In addition, lenders must waive any penalties or fees, and help pay for the origination and closing costs of the new loans.

Most homeowners will have seen the equity in their homes disappear before being able to refinance under this program.  In addition, the FHA will get a portion of any future profits on the house, to make sure the government recoups its investment over the long run.

Q:  Will this law reward families who bought homes they could not afford?

A:  Many homeowners facing foreclosure were misled, were deceived, or were in other ways the victims of unfair lending practices. 

To prevent future abuses by lenders, this law will establish a nationwide loan originator licensing and registration system to set minimum standards for all residential mortgage brokers and lenders.  It also strengthens mortgage disclosure requirements to help ensure that borrowers understand their mortgage loan terms.

Q:  How will this law make it more affordable to own a home?

A:  There are a number of provisions that will make homeownership more affordable:

• Creates a refundable tax credit for first-time homebuyers that works like an interest-free loan of up to $7,500 (to be paid back over 15 years).
• Grants states $11 billion of additional tax-exempt bond authority in 2008 that they can use to refinance subprime loans, make loans to first-time homebuyers and to finance the building of affordable rental housing.
• Raises conforming loan limits for the FHA, Fannie Mae and Freddie Mac to $625,500.  Because of the high cost of housing in California, a majority of the state’s residents were previously shut out from these programs.  Raising these loan limits will lead to lower interest rates on some loans, greater refinancing opportunities, and enable more borrowers in high cost areas to avoid the type of nontraditional and frequently abusive loans that led to the current crisis.
• Provides couples using the standard deduction with up to an additional $1,000 deduction for property taxes ($500 for individuals).

Q:  Does the law provide help to those who still cannot afford to own a home?

A: Yes.  The bill includes a number of provisions to increase the supply of affordable housing, which has been a major problem in California pre-dating the current foreclosure crisis.  For example:

• The bill creates a new permanent affordable housing trust fund – financed by Fannie Mae and Freddie Mac and not by taxpayers – to fund the construction, maintenance and preservation of affordable rental housing for low and very low-income individuals and families nationwide in both rural and urban areas. 
• In addition, the legislation provides a temporary increase in the Low-Income Housing Tax Credit and simplification of the credit to help put builders to work to create new options for families seeking affordable housing alternatives.