FHA ending Hope for Homeowners program

by Peter G. Miller
July 5th, 2011

The Federal Housing Authority (FHA) is ending the Hope for Homeowners (H4H) program and not too soon.

The essential idea behind the H4H effort was to help underwater homeowners refinance toxic loans into FHA mortgages. Sounds good–at first–but in fact the program was doomed from the day it started in 2008.

To participate in H4H you must have a borrower who needs help and a lender willing to reduce the principal balance of the loan. Since lenders have little interest in reducing principal balances, you can image that few Hope for Homeowner loans were written. As to borrowers, they had to be refinancing a prime residence and could not own a second home or investment property. The borrowers must need help because their loan payments have shot up and represent more than 31 percent of their monthly income.

But the program also contained some unusual provisions.

H4H: the details

First, the amount financed could only be equal to 90 percent of the property’s value. So, if you have a $400,000 home that was financed with 5 percent down the initial loan amount would be $380,000. If the value of the property today was $350,000 it would mean that the largest H4H mortgage could be no more than $315,000. The lender in this example would have to accept a loss of roughly $65,000. For many lenders, the better option was a foreclosure or short sale.

Second, the H4H program originally demanded that borrowers enter into a profit-sharing agreement with the government as a condition of getting a new loan. How much would the government get in “appreciation sharing” with a new mortgage? Fifty percent of any value increase.

In May 2009 we said the program was unworkable and should be dropped and now HUD has agreed. No more Hope for Homeowners after Sept. 30, 2011. The last day to hand in an H4H application is July 29, 2011, but don’t expect a big rush at lender offices.

Running the numbers

How big a flop was Hope for Homeowners?

There were

107 H4H mortgages in fiscal 2010 and 227 as of May in fiscal 2011. So yes the program has grown, but consider that in fiscal 2010 there were 1.7 million FHA loan approvals.

The fact that demand for H4H financing increased this year should surprise no one. In the major foreclosure areas–California, Nevada, Florida, Arizona and Michigan–market values have fallen so much that 10 percent of current property values may seem like a good idea to lenders as they see their other choices.

Outside the major foreclosure areas there is little possibility that lenders would be interested in writing down loans. And since it takes lender acceptance to get refinancing under the Hope for Homeowners program, the program is largely doomed.

Since 2008 H4H did essentially nothing to help the foreclosure crisis it was supposed to relieve so the end of the program should bother no one.

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