New program helps those with unaffordable mortgages

WASHINGTON — Borrowers struggling with unaffordable mortgages may be eligible for help from a government-backed program, Housing and Urban Development Secretary Steve Preston said Wednesday.

"For homeowners in trouble, this may be the help they need," he said.

At a news conference, Preston rolled out details of the Hope for Homeowners program, which Congress approved in July as part of the Housing and Economic Recovery Act of 2008. The law set an October launch for the program for borrowers who are "upside down" — that is, who owe more than their homes are worth because of plunging property values.

The Hope program provides insurance, offered through the Federal Housing Administration, to help qualifying owner-occupants replace their unaffordable loans with fixed-rate 30-year mortgages.

A rewritten loan would be for 90 percent of the home's reappraised value, up to $550,440. Because of the FHA insurance, borrowers could get lower interest rates than otherwise might be available. Also, because of the fixed terms, families no longer would have to worry about adjustable-rate mortgages driving their monthly costs higher year after year.

The three-year program to refinance up to $300 billion in mortgages is voluntary, so lenders must agree to write down the value of the old mortgages being replaced. But many lenders may want to participate in order to curb the surge in defaults.

Mortgage Bankers Association chief operating officer John Courson released a statement saying the Hope program "will provide lenders with another important tool to help keep families in their homes. Nobody wins when a home goes to foreclosure. This program will help the government, lenders and homeowners work together to avoid that end."

Borrowers will have to pay some costs to participate in the program. They will be assessed an "upfront mortgage insurance premium" designed to shield taxpayers from losses. HUD will impose a 3 percent upfront premium when borrowers go into the Hope program, and then charge another 1.5 percent each year thereafter.

Borrowers who accept the mortgage relief and then see the value of their property rise also have to share part of the increased value with the government.

HUD and FHA provided no estimates of how many borrowers or lenders may participate.

And just how fast homeowners can get relief is still unclear. An official overseeing the program, who refused to be identified, said lenders will need "a few days to redo their systems" to be able to make the new insured loans. "It'll take a little while to officially stand it up," he said of the program.

Despite the uncertainties about whether and when lenders will be ready to participate, Preston said struggling borrowers should reach out for help. "I strongly encourage homeowners and lenders to look into this program and other FHA products without delay," he said.

The program is being launched at a time when Congress is still trying to complete a separate bailout bill for the financial industry. In recent weeks, credit markets have seized up, making loans of all sorts scarce. Exactly how the new bailout legislation might affect mortgages is not entirely clear, but it likely would expand help for struggling homeowners.

Preston said he decided not to hold back the Hope program to see what additional directives may be coming from Congress this year. If new refinancing tools are made available for the program, "we'll work hard to expand it appropriately," he said.

Russell Grooms, a real estate broker in the hard-hit state of Florida, said any help from Washington would be welcome at a time when the foreclosure crisis may be deepening.

"It is very appropriate for HUD to get involved in helping those folks who, because of current economic conditions, may be losing their homes," said Grooms, who works for Watson Realty Corp. in Jacksonville.

Far from being over, the wave of foreclosures will continue as the economy worsens, he predicted. "I think we'll have another year of this stuff," he said.

'HOPE FOR HOMEOWNERS': HOW IT WORKS

The program refinances mortgages for borrowers who are having difficulty making their payments, but can afford a new loan insured by the Federal Housing Administration.

YOU'RE ELIGIBLE IF:

— The home is your primary residence, and you have no ownership interest in any other residential property.

— Your mortgage was originated on or before Jan. 1, 2008, and you have made at least six payments.

— You cannot pay the existing mortgage without help.

— As of March 2008, your total monthly mortgage payments were more than 31 percent of your gross monthly income.

— You can certify you have not been convicted of fraud in the past 10 years, intentionally defaulted on debts, and did not knowingly or willingly provide material false information to obtain your existing mortgage.

REQUIREMENTS FOR LENDERS AND BORROWERS

— The maximum loan is $550,440.

— The new mortgage will be no more than 90 percent of the new appraised value.

— The new appraised value includes an Upfront Mortgage Insurance Premium of 3 percent. Borrowers also pay an Annual Mortgage Insurance Premium of 1.5 percent.

— Standard FHA closing costs apply.

— The borrower must agree to share with FHA both the equity created at the beginning of this new mortgage and any future appreciation in the value of the home.

— The borrower cannot take out a second mortgage for the first five years of the loan, except under certain circumstances for emergency repairs.

— Holders of existing mortgage liens must waive all prepayment penalties and late payment fees. Existing subordinate lenders must release their outstanding mortgage liens.

— The existing first mortgage must accept the proceeds of the new loan as full settlement of all outstanding indebtedness.

Source: Department of Housing and Urban Development

Marilyn Geewax is a Washington correspondent for Cox Newspapers.