Was Principal Reduction With The Old HOPE For Homeowners - H4H Program A False HOPE?
by Upside Down Mortgage Loan Modification Expert - Dan North
HOPE For Homeowners - H4H is a hold over from the Bush Administration. Was it a good idea that never caught on or Political lip service? The Obama Administration is revamping this program and including it in the Making Home Affordable Programs. There have already been several major amendments that have significantly improved HOPE For Homeowners Principal Reduction Program making it much more financially attractive for borrowers and lenders to participate.
Why The Old HOPE For Homeowners H4H Never Caught On
Reason #1: This was legislation created by "Politicians": While the idea may be good how they went about implementing it did not work
Reason #2: The Government saw this as a chance to grab income. While sharing the equity created created by principal reduction with the lender may have been reasonable, Politicians got greedy with the shared equity and shared appreciation at the lender and borrowers expense and claimed it as Government income.
Reason #3: The FHA Insurance fees were too high. The short refinance was required to be a 30 year fixed interest FHA Insured loan. A 30 year fixed interest was a good idea but the FHA Insurance Premium was 4% of the loan amount upfront and 1.5% of loan amount annually, collected monthly. Very expensive.
Basically this legislation tried to force a Government solution down lenders throats without consulting them on how to make it work.
Granted there were some good ideas that may have worked but let's be realistic. Lenders are in business to make money on lending money.
Was The Old HOPE For Homeowners Just a Rip Off?
Under the old H4H Short Refinance Program the lender would write off principal down to 90% or below the market value of the home. Good so far.
Here is where the politician got greedy. The lender writes off the principal reduction that creates 10% in the home. The the government grabs a share in that equity and any appreciation for themselves. Why would a lender go for that?
If you lent someone $1,000 and the government came in and told you to reduce the debt to $500, would you? Maybe.
Suppose the Government says the borrower does not have to pay back $500 of the $1,000 loan, but when the borrower can afford to, they are to pay back that $500 to the Government and not to you. What would you think of that? Right!
The old H4H Short Refinance Plan was a rip off as far as the lender was concerned.
Fixing This Short Refinance Plan So It Works
Go to lenders and find out what makes financial sense and how this could be done to work
Any equity sharing is paid to the lender
Drop all appreciation sharing
Lower FHA Insurance Premium fees
Include matching Government funds on reductions similar to Home Affordable Modification Program, where the lender lowers the monthly payment from 38% to 31% of borrowers gross income and the Government reimburses the lender/investor 50% of the lost monthly income.
New Improved Short Payoff Refinance
Equity sharing goes to the lender/investor
Appreciation sharing is completely dropped
FHA Insurance Premium Rates have been cut in half
Below the point the lender is reluctant to write off principal the lender can now create a 2nd subordinate lien for the principal reduction amount required to lower monthly payments to 31% of the borrowers gross income and the target percent of the market value. The payments and interest on the subordinate 2nd lien can be deferred for 36 months or more.
The Obama Administration is improving this Short Refinance Program by making it more financially attractive for lenders/investors to participate.
The most obvious changes have been made but I expect more to come. The most recent changes are only a few weeks old and there have been monthly updates and amendments to this program.
What Is Next for HOPE For Homeowners
I do expect the Government to come up with cost sharing incentive similar to the Home Affordable Modification Program. This would offset the monthly lost income allowing lenders/investors to make larger principal reductions. Combined with subordinate 2nd liens that have differed interest and payments for 36 months or more, should create a situation where lenders will participate in this program.
Will Lenders Participate In The New HOPE For Homeowners Program
Currently as part of the HAMP Trial Period all loans are to be reviewed for eligibility in the HOPE For Homeowners Short Refinance Program. If they qualify for the Short Refinance the borrower is to be offered the opportunity to use HOPE For Homeowners Short Payoff.
Now we just wait to see if lenders/investors like the new improved HOPE For Homeowners Short Refinance and start to participate.
Only Time will tell.
The only other option is to ask the lenders and investors what it would take to get their participation. Novel idea, just might work.
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