The legislation first announced by Chairman Barney Frank in March, will be divided into two measures: H.R. 5830, the FHA Housing and Homeowner Retention Act, to expand the FHA program to help refinance at-risk borrowers into viable mortgages and also requires the Federal Reserve Board to conduct a study on the need for an auction or bulk refinancing mechanism.  The second measure, H.R. 5818, the Neighborhood Stabilization Act of 2008, introduced by Subcommittee on Housing and Community Opportunity Chairwoman Maxine Waters, will provide loans and grants to states and cities to deal with problems associated with large numbers of foreclosures in neighborhoods across the country.

A committee mark up session and vote on the two measures are scheduled for 10:00 a.m. on Wednesday, April 23^rd and Thursday, April 24^th.

A summary of the H.R. 5818, the Neighborhood Stabilization Act of 2008 as follows:

Neighborhood Stabilization Act of 2008

Summary of H.R. 5818

Summary

The bill would establish a $15 billion, HUD-administered loan and grant program for the purchase and rehabilitation of owner-vacated, foreclosed homes with the goal of stabilizing and occupying them as soon as possible.  $7.5 billion of the funds would be for loans, and the other $7.5 billion would be for grants.

Each State’s loan and grant authority would be based on the State’s percentage of nationwide foreclosures over the last four calendar quarters, adjusted to account for the State’s relative median home price.  States could allocate funds to government entities (e.g., housing authorities) and nonprofits for the purchase, rehabilitation, and resale of homeownership housing and the purchase, rehabilitation, and operation of rental housing.  A State would be required to direct funds to a city within its bounds if that city is one of the 25 most populous in the nation according to a formula based on the city’s share of total State foreclosures and relative home prices.

Loans would be non-recourse, zero-interest loans to finance acquisition and rehabilitation costs.  The federal government would 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 is five years.  In addition, the federal government would receive 20 percent of any appreciation a property owner realizes at resale.

Grant funds could be used toward 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; property acquisition costs; and State and grantee administrative costs.  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 (AMI).  Properties purchased for rental must serve families having incomes at or below AMI.  However, States would be required to give preference to activities serving the lowest income families for the longest period and homeowners whose mortgages have been foreclosed.  The bill would also give States the explicit authority to provide preferences for otherwise income-eligible veterans, teachers, workforce, and homeless persons.

At least 50 percent of the grant money must be targeted to house families at or below 50 percent of AMI, and not less than half of this money must target families at or below 30 percent of AMI.  The bill would also explicitly prohibit discrimination against voucher holders and provide eviction protections for tenants in foreclosed properties.

A summary of the H.R. 5830, the FHA Housing and Homeowner Retention Act as follows:

FHA Housing Stabilization and Homeownership Retention Act

Summary of H.R. 5830

Summary of the Expanded FHA Refinance Program.  This voluntary program would permit FHA to provide up to $300 billion in new guarantees to help refinance at-risk borrowers into viable mortgages.  This $300 billion is the total amount of outstanding loans that may be insured under the program.  The government would only have liability if a borrower defaults and the amount recovered in foreclosure is below the outstanding principal.  While CBO is still reviewing the proposal and has not released their report, we believe that the program will have an ultimate cost between 1 and 2 percent of this $300 billion authorization.

In exchange for the acceptance of a substantial write-down of principal, the existing lender or mortgage holder who chooses to participate would receive a “short payment” (i.e. a payment for less than the outstanding balance as payment in full) from the proceeds of a new FHA-guaranteed loan if the new loan would have terms that the borrower can reasonably be expected to pay and the borrower agrees to share future home appreciation with the government.  In short, the program would provide refinancing assistance to allow families to 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 government will retain a share of future home-price appreciation to help defray 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 from borrower profits.

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 on or before December 31, 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 35 percent as of March 1, 2008, and must certify that he/she has not intentionally defaulted on existing mortgage(s);

·        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; and

·        Existing mortgage holders/investors must accept their losses – taking substantial write-downs sufficient to: (1) establish a 3 percent loan loss reserve for the FHA; (2) pay the origination and closing costs for the new loan up to 2 percent; and (3) bring the loan-to-value ratio on the new FHA-guaranteed loan down to no greater than 90 percent of property’s current appraised value, resulting in a substantial reduction in debt service to the borrower.  Accordingly, to qualify mortgage holders would need to accept a substantial write-down, accepting as payment in full no more than 85 percent of the property’s current appraised value.

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 payment level to qualify for the guarantee);

·        New FHA loan must extinguish all existing liens and substantially reduce the borrower’s mortgage debt service;

·        New FHA loans under this program must be within the FHA loan limits now in effect under the stimulus for the duration of this program;

·        Oversight Board 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 share of the borrower’s future profits.  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.

Oversight Board.  The program will be overseen by a “Refinance Program Oversight Board” consisting of the Secretary of Treasury, the Secretary of HUD, and Chairman of the Federal Reserve.  

Coordination of Existing Lien-Holders.  The Oversight Board will be authorized to take action to facilitate coordination among different existing lien-holders; and shall be empowered to establish a formula for compensating and a mechanism for obtaining the voluntary waiver of all 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 through GNMA.

Improving FHA Capacity.  The Oversight Board will take actions as necessary to increase FHA’s capacity, including:

·        Treasury, Federal Reserve and HUD may sharing employees to improve FHA capacity;

·        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 HUD personnel.

Auction or Bulk Refinance Study.  The Federal Reserve Board will be required to conduct a study of the need for, and efficacy of, an auction or bulk refinancing mechanism and submit a report to Congress within 60 days of enactment.

Increased Fraud Prevention/Oversight.

·        Independent quality reviews will be established to determine underwriter compliance, and rates of delinquency, claims and losses;

·        Monthly reports will be submitted to Congress; and

·        Annual audit of the program will be conducted.

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

Authorization for Foreclosure Counseling & Legal Aid.  The bill would authorize $200 million dollars for foreclosure counseling, with at least $30 million targeted to low-income and minority homeowners and $30 million to assist with legal aid.