Monday, October 26, 2009

New FHA Hope for Homeowner guidelines

HUD has released the new guidelines for the FHA Hope for Homeowners (H4H) program. Readers may remember that the previous version of H4H failed miserably and was completely ineffective. This version was designed to be more readily available to lenders so they could foist their toxic waste onto the backs of the taxpayers. I am sure it will be wildly successful in doing so.

With this version, if a borrower isn't yet in default the lender can refinance up to 105% LTV. If a borrower is in default the lender can lend up to 96.5% LTV if they keep 31/43 front/back debt to income ratios. And if a borrower is in default and the lender wants to push the ratios to 38/50 then the max LTV becomes 90%. Readers may remember the previous version required a max LTV of 90% regardless of scenario. I think the "borrower not in default" version will be very popular as it cleans up the banks books very nicely and turns toxic sludge into a loan in which no capital needs to be held against it since it is now guaranteed by the US government.

The up front mortgage insurance premiums (MIP) was 3% in the previous version and now it becomes 2%. The annual premium was 1.5% in the previous version and it is reduced to .75%. These premiums are what protects the taxpayers from having to bail out the FHA. Obviously the banks would want them as low as possible so that the borrowers are paying the banks more money rather than covering the FHA from losses. It looks like the banks did pretty good (from their point of view) in getting them reduced. Anyone thinking that the FHA won't be bailed out is delusional. It is simply a matter of when.

I went over what I thought the effects of this new H4H plan would be back in a post (more accurate: Rant) in early September that readers can read here:

"The Fed can tremendously influence rates, however temporarily, they can bring down rates to even lower levels so the qualification for H4H is easier and the banks can put as many loans in H4H in as little time as possible. While there may be a hit to capital to the banks they magically turn a non-performing loan into a performing loan which carries zero risk and they wouldn't have to withhold any capital or increase loan loss reserves against it."

I think that the underwriting details are sufficiently "loose" that the prediction could hold true. The banks will have to take principal write downs but I would bet for many non-performing loans the ability to refinance to FHA would actually free up capital. I would expect transaction volumes to drop even further as even less motivated supply comes on market. Fewer short sales due to H4H, fewer foreclosures due to HAMP. There will clearly be fewer people making their living in construction, real estate agents, and in the lending field as a result. Asset price "stability" will be maintained at a huge cost to taxpayers and the real estate industry but it is public policy that prices must be maintained. Allowing a massive credit bubble in the name of "free markets" but then socializing the losses AND having a policy that deflation will not be tolerated makes some pretty wacky (i.e. stupid) ideas suddenly sound logical to those desperate to "do something".

I wonder if the politicians have heard, or care about, adverse selection. I guarantee the banks are well versed and will act accordingly. The worst of the worst will get refinanced and the "good" loans won't be so the banks can maximize profit.


longhorn said...

Can you give a bulleted cliff note summary on what exactly this program is doing? You would save me some reading.

Perhaps the most absurd case?

Is it refinancing the mortgage down to a new appraisal value or to an allowable debt-to-income ratio? Both? So, the bank would be taking a loss similar to a short sell, but get the risk of a default off their backs since it is backed by the FHA?

Effective Demand said...


You last paragraph sums the program up pretty well. I think the loss would be less than a short sale in many cases.