Final Rule on Hope for Homeowners Program for Subordinate Lienholders

CUNA
October 24, 2008 | COMMENTS

The Housing and Economic Recovery Act, which was signed into law by President Bush on July 30, 2008, directs the Federal Housing Administration (FHA) to refinance up to $300 billion in troubled, subprime mortgages through the Hope for Homeowners (H4H) Program. Under this program, effective for loans originated on or before January 1, 2008, eligible homeowners will be able to refinance their subprime, primary residence home loans into fixed-rate, FHA-backed loans. To qualify, the lender or mortgage investor must reduce the loan principal and would receive a guarantee for no more than 90% of the home's current appraised value.

In addition, the lender would have to pay a 3% FHA loan origination fee. In exchange for an FHA guarantee on the mortgage, borrowers must share with the FHA the newly created equity and any future appreciation from the resale of the refinanced home.

The program became effective as of October 1, 2008. In order to qualify for the program, homeowners must have more than 31% of their monthly income dedicated toward their mortgage payment as of March 1, 2008. There are also various limits as to how much of the borrower's income can be dedicated to the monthly payments on the new loan. Click here for more information about the H4H program.

The H4H program is voluntary and all lienholders must agree to participate, including any subordinated lienholders who may hold home equity or other similar type loans. The H4H program also allows the subordinated lienholders to share in any future appreciation of the property as a means to encourage them to participate in the program.

The H4H Board of Directors has recently issued a final rule as to how any future appreciation is to be shared with the subordinated lienholders. The subordinated lienholder may receive up to 9% of the subordinated loan balance if the cumulative loan-to-value ratio exceeds 135% or up to 12% if this ratio is less than or equal to 135%. These funds will come from FHA's share of the future appreciation, which is split evenly between FHA and the borrower. Under this approach, the future appreciation must be at least twice the subordinated loan balance in order to receive the entire 9 or 12 percent share.

Here's an example of a refinanced loan that describes these calculations:

First Mortgage Loan = $130,000

Home Equity Loan = $ 20,000

Total of all Loans = $150,000

Current appraised value $120,000

In this example, the cumulative loan to value ratio is 125% (150,000/120,000) so the subordinated lienholder is eligible to receive up to 12% of the $20,000, or a total of $2,400. The property would have to appreciate $40,000 in order to receive this amount because the funds would come from FHA's share of the appreciation and the property would have to appreciate $40,000 in order for FHA to receive the $20,000 that would be needed to provide the maximum $2,400 payment.

The recently enacted Emergency Economic Stabilization Act that created the $700 billion Troubled Asset Recovery Program will allow FHA to pay a negotiated amount up-front to the subordinated lienholder at the time the loan is refinanced, as opposed to providing the payment when the property is sold. This negotiated amount would likely be substantially less than the maximum possible amount. The FHA will provide additional guidance in the near future on how these new provisions will be implemented.

Alternatively, the primary lienholder may also negotiate to purchase up-front the subordinated lienholder's rights to future appreciation. If neither the FHA nor the primary lienholder purchases these rights, the subordinated lienholder will receive a “shared appreciation certificate” that will document the right to receive the allowed portion of the future appreciation. Again, the decision to agree to this arrangement is at the discretion of each lienholder.

If you have questions or need a copy of the final rule, please feel free to contact Senior Vice President and Deputy General Counsel Mary Dunn by e-mail at mdunn@cuna.coop or by telephone at (800) 356-9655, extension 6736, or contact Senior Assistant General Counsel Jeff Bloch by e-mail at jbloch@cuna.coop or by telephone at (800) 356-9655, extension 6732. You may also access the final rule on the Internet by clicking here.

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