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.

End Game?

Much of this post is speculation on future events by me. Do not take my opinion/rant as facts. I only offer up a possible outcome over the near future for the housing market. As I have watched the market I have seen little more than the emergency brake have been hit by the Fed with little resolution to the fundamental problems facing the market of overleveraged borrowers getting in way over their heads. I present this as possible outcome:

I found this summary of a report Amherest Securities Group on Housing Wire
to be interesting and could point to a final plan developing to remove the mortgages off the banks books and onto the backs of the taxpayers. Basically the report points out that short sales result in higher recovery rates than foreclosures. This makes sense for two reasons. One, the property is still owner occupied or just recently vacated meaning the home would have less deferred maintenance than your typical foreclosure. And two in a declining market the sooner you get out the more your recover. This shows why the industry needs to come up with a uniform way of first and junior liens cooperating to divvy up the proceeds of a short sale instead of the senior liens telling the junior liens "this is what we are offering" and the junior liens using the "hostage value" of their lien to try and get more.

The other part of this report points out that a new Hope for Homeowners (H4H) is in the works. With this option Amherst believes the loss would be the same as the short sale, the owner still keeps the home and the bank no longer has a bad loan on its books. Any default from that point forward comes out of the FHA insurance fund and, if that fails, the taxpayers. I believe this to be the end game for the administration. 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.

Moral Hazard? Yes, not an issue to the Fed. Price Discovery? No, exactly what the banks and government want. Overleveraged borrowers get to keep "their" home? Yes. Saving the too big to fail banks? Yes, it may require an additional capital injection depending on the initial H4H losses. Keeping the housing market stagnated and inflated? Yes.

I think it is as good as the administration can expect given their goals of keeping the housing market inflated and as many borrowers in homes as possible. Needless to say I see a taxpayer funded bailout for FHA coming a few years down the road but they get to kick the can and politicians will always do that over making the tough decisions.

The only losers are the fiscally responsible and those who pay the majority of taxes. Truely this is an ownership society and homeowners are a protected class of people. I am sure we will hear more about a new much more lenient H4H probably by early next year.

EDIT:
From the April 28, 2009 MHA press release:

"Support for Legislation to Strengthen Hope for Homeowners: In order to ensure that many more borrowers are able to participate in Hope for Homeowners, we are working to improve the program and actively pursuing legislation so that the FHA may reduce fees paid by borrowers, increase flexibility for lenders to refinance troubled loans, permit borrowers with higher debt loads to qualify, and make further improvements to strengthen Hope for Homeowners so that it can function effectively as an integral part of the Making Home Affordable Program. "


"Treasury Purchase of Special Ginnie Mae Pools to Provide Liquidity for Hope for Homeowners Loans: Under HERA authority, Treasury or the GSEs would purchase special Hope for Homeowners Ginnie Mae IIs wrapped by the GSEs. These purchases will increase secondary market liquidity for new Hope for Homeowners loans, supporting additional assistance to homeowners. "

Administration set to announce plan for junior liens.

The Administration is set to announce the plan for the modification of second liens. The details aren't fully released yet but their will be an incentive ($500 a year plus $250 the next 3 years) for servicers to modify junior liens. There will also be a payment schedule for the junior lien investors to extinguish the liens. More from the WSJ:

Under the program, servicers must agree to modify all second mortgages where the first mortgage has already been modified. To qualify for payment, servicers must extend the term of the second mortgage and reduce the interest rate to match the first mortgage. Then, the government will share the cost with the servicer of reducing the rate down to 1% for amortizing loans and 2% for interest-only loans.

Borrowers will receive payments of up to $250 per year for as many as five years if they stay current on the loan. The payments will be applied to pay down principal on the first mortgage.

The Administration is also announcing new incentives for getting homeowners into Hope for Homeowners in order to increase participation in the program. The silver lining of all this is that servicers should finally finish the triage they started months ago and start foreclosing en masse on those who don't qualify. Once the full plan is announced I will provide the details.