FHA Housing Stabilization & Homeownership Retention Act

(SUMMARY OF DISCUSSION DRAFT)

 I.          Expanded FHA-Refinance for Individual Borrowers

Summary.  Program would permit FHA to provide [up to $300 billion] in new guarantees that would help to refinance at-risk borrowers into viable mortgages.  In exchange for the acceptance of a substantial write-down of principal, the existing lender or mortgage holder would receive a short payment from the proceeds of a new FHA loan if the restructured loan would result in terms that the borrower can reasonably be expected to pay.  The existing lender or mortgage holder will have a cash payment and no further credit exposure to the borrower.  This could potentially refinance between 1 and 2 million loans (and help these families stay in their homes), protect neighborhoods and help stabilize the housing market.

Under the program, a borrower or existing loan servicer of an eligible loan would contact an FHA-approved lender, who would determine the size of a loan that would be consistent with the requirements of the program and that the borrower could reasonably repay.  If the current lender or mortgage holder agrees to a write-down that is sufficient to meet the requirements of the program and make the new loan affordable, the FHA-lender will pay off the discounted existing mortgage.

In addition to a first lien, the program gives the government a soft second lien to help defer the government’s costs and prevent unjust enrichment (e.g., borrower flipping).  When the borrower sells the home or refinances the loan, the borrower will pay from any profits the higher of (1) an ongoing exit fee equal to 3 percent of the original FHA loan balance; or (2) a declining percentage of any profits (e.g., from 100 percent in year one to 20 percent in year five and 0 thereafter). After year five only the 3 percent exit fee will apply.

Eligibility Requirements for Existing Loans (Requires All of the Following):

•  Owner-occupied principal residences only (no investors, speculators or second homes);
•  [Existing senior loan being refinanced must have been originated between January 1, 2005 and July 1, 2007]; 
• To remove any incentive for borrowers to “purposely default,” the borrower must have had a mortgage debt-to-income ratio of no less that 40 percent as of March 1, 2008, and must certify that he/she has not intentionally defaulted on existing mortgage(s).  Regulators can make exceptions for involuntary changes after that date;
• Participating mortgage holders/investors must waive any penalties or fees on the existing mortgage and must accept proceeds of the new loan as payment in full;
• Existing mortgage holders/investors must accept their losses – taking substantial write-down sufficient to establish a 5 percent loan loss reserve for the FHA, bring the loan-to-value ratio on the new FHA-loan down to no greater than 90 percent of property’s current appraised value, result in a meaningful reduction in mortgage debt service by the borrower, and to pay all up-front fees for the new loan. Accordingly, to qualify, mortgage holders would need to accept a substantial write-down, receiving no more than 85 percent of the property’s current appraised value as payment in full for the existing loans.

Requirements for New FHA-Insured Loans:

•  New FHA loans must be properly underwritten and must be based on current appraised value of the house and borrower’s documented income (borrowers with higher (but not disqualifying) debt levels would need to make six months of timely payments at the new FHA payment level to qualify for the guarantee);
• New FHA loan must extinguish all existing liens and meaningfully reduce the borrower’s mortgage debt service;
• New FHA loan must be within applicable FHA loan limits;
• HUD will set reasonable limits on loan fees and interest rates; and
• To reduce costs to the government – and avoid inappropriate enrichment to the borrower – the government will retain a second lien on the property.  When the borrower sells the home or refinances the loan, the borrower will pay from any profits the higher of (1) an ongoing exit fee equal to 3 percent of the original FHA loan balance; or (2) a declining percentage of any profits (e.g., from 100 percent in year one to 20 percent in year five and 0 thereafter). After year five only the 3 percent exit fee will apply.
   

Coordination of Existing Lien-Holders.  The Secretary of HUD will be authorized to take action to facilitate coordination among different existing lien-holders.

Separate FHA Fund.  To protect the FHA Mutual Mortgage Insurance Fund, these new loans will exist in a separate fund in FHA – and will be permitted to be resold (together or separately) through GNMA.

Improving FHA Capacity.  The FHA shall take actions as necessary to increase its capacity, including:

• Contracting for the establishment of underwriting criteria, pricing standards, and other factors relating to eligibility;
• Contracting for independent quality reviews of the underwriting of these mortgages; and
• Increasing personnel.

Increased Fraud Prevention/Oversight

•  The HUD Secretary shall establish independent quality reviews to determine underwriter compliance, and rates of delinquency, claims and losses;
• Submit semi-annual reports to Congress; and
• HUD Inspector General shall conduct annual audit of the program.

Sunset.  The program will run for 2 years (with flexibility for the Secretary to make additional 6 month extensions not to exceed 2 more years). 

II.        FHA Bulk-Refinance Facility

Summary.  The legislation would permit the loan program under title I of the bill to be used to refinance and guarantee mortgages through a facility that would provide for auction or other mechanism to refinance loans on a bulk basis. 

A “Refinance Program Oversight Board” consisting of the Secretary of Treasury, Secretary of Housing and Urban Development, and Chairman of the Federal Reserve Board would be required to develop a potential structure for conducting auctions or other bulk refinancing within 60 days of enactment.  The program would not commence operations, however, unless the Oversight Board determined that there was a feasible auction or other bulk refinancing structure would provide an effective and efficient system for bulk loan refinancing and was needed to stabilize the housing markets and reduce impact on the U.S. economy. 

Under the program, the Oversight Board would appoint and oversee an auction agent that would solicit bids from lenders and servicers for delivery of restructured loans for insurance by the FHA.  Bidders could compete to offer mortgages based on criteria to be established.  Only loans eligible for refinancing under title I of this legislation would be eligible.

III.       Loans and Grants to States for Foreclosure Relief/Mitigation

• The plan would provide $10 billion in loans and grants for the purchase and rehabilitation of vacant, foreclosed homes with the goal of occupying them as soon as possible. 
   
• Each state’s loan and grant authority will be based on the state’s percentage of nationwide foreclosures adjusted to account for the state’s median home price. States can allocate funds to government entities (e.g., housing authorities), nonprofits, and private-sector entities for the purchase and resale of homeownership housing.  However, only government entities and nonprofits can receive these funds for rental housing developments.
   
• Loans will be non-recourse, zero-interest loans to finance acquisition and rehabilitation costs.  The government will be paid back from resale or, in the case of rental properties, refinance proceeds.  Loans for homeownership properties must be repaid within two years.  For rental properties, the maximum loan term will be five years.  In addition, the federal government will receive 20 percent of any appreciation a property owner realizes at resale.
   
• 25 percent of the state’s funding authority could be used grants, for purposes which include property taxes and insurance during the pre-occupancy phase; operating costs such as property management fees, property taxes and insurance during the period a property is rented costs incurred related to property acquisition; and administrative costs by the state and grantees to run the program.  Grants could also cover down payment and closing cost assistance.
   
• Homes purchased for resale must be sold to families having incomes that do not exceed 140 percent of area median income.  Properties purchased for rental must serve families having incomes at or below area median income.  However, states are required to give preference to entities that will use the funds to serve the lowest income individuals for the longest periods.