FHA Refinance of Borrowers in Negative Equity Positions

Report
FHA Refinance of
Borrowers in Negative
Equity Positions
Who is the target market?
FHA’s new refinance opportunity is targeted to
help people who owe more on their mortgage
than their home is worth because their local
markets have seen large declines in home
values.
What are the borrower eligibility
requirements?
• Existing loan to be refinanced is not FHA
insured;
• Must owe more on their mortgage than the
value of the property;
• Must be current on the existing mortgage to
be refinanced;
• Must have a “FICO based” decision credit
score greater than or equal to 500;
What are the borrower eligibility
requirements?
• Existing first lien holder must write off at least
10% of the unpaid principal balance (UPB);
• Loan-to-value (LTV) ratio of no more than
97.75%;
• Combined loan-to-value (CLTV) ratio must be
115% or less; and
• For manually underwritten loans, the qualifying
ratios can be no greater than 31/50.
Standard FHA underwriting requirements apply
Is a homeowner with a conviction
eligible for the Short Refinance?
A homeowner is not eligible for assistance under
any mortgage assistance program authorized or
funded by EESA if such person, in connection with
a mortgage or real estate transaction, has been
convicted within the last 10 years of any of the
following: (a) felony larceny, theft, fraud, or
forgery; (b) money laundering; or (c) tax evasion.
Can lenders pay off the borrowers’
debts?
• Premium pricing cannot be used to pay off
existing debts to qualify the borrower;
• FHA mortgagees are not permitted to make
the borrowers’ mortgage payments or
otherwise bring the existing loan current; and
• Existing loan to be refinanced may not have
been brought current by the existing first lien
holder, except through an acceptable
permanent loan modification.
Is a recently modified loan
considered current?
Yes.
– For loans modified under the Making Home
Affordable Modification Program (HAMP)
program, the loan may close the month
following permanent modification.
– For non-HAMP modification program loans, the
borrower must have made three monthly
payments on time and the modified mortgage
must be current for the month due.
Loans in a temporary or trial period are not
eligible.
Is secondary financing permitted?
Yes.
– The subordinate lien(s) must not provide for a
balloon payment before ten years;
– Must permit prepayment by the borrower,
without penalty, after giving 30 days advance
notice;
– Periodic payments shall be collected monthly;
and
– Payments on subordinate financing are required
in the qualifying ratios.
How will these refinance loans
affect the lender’s performance?
• Neighborhood Watch will display these
refinance loans separately in the lender’s
performance compare ratio.
• For the Credit Watch Termination initiative,
these refinance loans will not be included in
HUD’s performance analysis of a lender’s
compare ratio.
• If a violation of any FHA program
requirements is found to have occurred, the
lender will be subject to administrative action
e.g., indemnification, possible civil money
penalties, etc.
Are there any changes to the claims
for insurance benefits?
• Lenders will be required to submit a separate
claim filing with the designated disbursement
agent for that portion which is payable from
the Emergency Economic Stabilization Act of
2008 funds; and
• Further instructions will be provided in a
subsequent Mortgagee Letter.
Does the borrower need to know any
additional information?
• Borrowers must be made aware that the short
refinancing under this program may be
reflected as a negative feature on their credit
score.
• Borrowers must be advised to consult with
their tax advisors regarding the cancellation of
debt and possible tax consequences.
Are there servicer incentives for
extinguishing all or part of the debt?
• First lien investors will not be entitled to
incentive payments for any of the debt
extinguished;
• Existing second mortgage lien servicers will be
entitled to a one time incentive of $500 for
each successful closing; and
• Existing second mortgage lien investors will be
entitled to an incentive based on the CLTV of
the existing liens if any portion of the debt is
extinguished.
Treasury FHA Refinance Compensation Per Dollar of
UPB Extinguished
in
(Loans Less than or Equal to Six Months Past Due)
105% to <115%
115% to 140%
>140%
0.21
0.15
0.10
For loans that were more than six months past due at any
time during the 12 month period prior to the FHA
Refinance closing date, irrespective of CLTV range, second
lien investors will be paid $0.06 per dollar of principal
extinguishment and will not be eligible for incentives in
the above extinguishment schedule.
What are the eligibility requirements
for second lien holders to receive
incentive payments?
• A second lien holder must execute a Servicer
Participation Agreement (SPA) and related
documents with Fannie Mae in its capacity as
financial agent as designated by Treasury on
or before October 3, 2010.
• Second lien holders that have previously
executed a HAMP SPA will be required to
execute an Amended and Restated SPA or an
additional Service Schedule that includes
FHA2LP, as applicable.
How can a second lien holder sign up
to be eligible for incentive
payments?
• Servicers that have not executed a HAMP SPA
should follow the online registration process at
www.HMPAdmin.com (click on the Registration
tab) or call the HAMP Support Center at 1866-939-4469.
• Servicers who have executed a HAMP SPA
must complete the appropriate registration
form(s) for FHA2LP and email them to the
HAMP Support Center at
[email protected]
Example
Scenario 1
Original Value
UPB First Lien
UPB Second Lien
Current Value
Max CLTV (115%)
New First Lien (97.75%)
New UPB Second Lien
Reduction by First Lien
Reduction by Second Lien
Net Forgiveness
350,000
280,000
70,000
210,000
241,500
205,275
36,225
74,725
33,775
108,500
• Loan is less than six months past due.
How is the incentive payment for the
second lien holder calculated?
Current CLTV - 167%
CLTV - 140%
Difference
Reduction Second Lien
Incentive Payment - $.10
350,000.00
294,000.00
56,000.00
33,775.00
3,377.50
The reduction of the second lien is less than $56,000
so the Treasury FHA Refinance Compensation would
be calculated at greater than 140% CLTV.
• Existing second mortgage lien servicers will be entitled to a one time
incentive of $500 for each successful closing.
Example
Scenario 2
Original Value
UPB First Lien
UPB Second Lien
Current Value
Max CLTV (115%)
New First Lien (97.75%)
New UPB Second Lien
Reduction by First Lien
Reduction by Second Lien
Net Forgiveness
100,000
60,000
60,000
60,000
69,000
58,650
10,350
1,350
49,650
51,000
• Loan is less than six months past due.
How is the incentive payment for the
second lien holder calculated?
Current CLTV - 167%
CLTV - 140%
Difference
CLTV - 115%
Difference
Reduction Second Lien
Incentive Payment - $.10 ($36,000)
Incentive Payment - $.15 ($13,650)
Total Incentive Payment
120,000
84,000
36,000
69,000
51,000
49,650
3,600
2,047.50
5,647.50
The reduction of the second lien is greater than difference
between current CLTV and 140% CLTV so $36,000 of the
extinguishment would be calculated at greater than 140% CLTV
and the remainder $13,650 would be calculated at 115% CLTV.
What are benefits of these
refinances?
• Provides lenders and borrowers with an
affordable stable loan product;
• Helps to stabilize communities that have seen
a decline in housing prices; and
• Costs will be shared between the private
sector (1st and 2nd lien investors) and the
federal government (HUD and Treasury).
– Private sector will be extinguishing debt.
– Treasury will be paying incentives to second
lien servicers and investors.
– HUD and Treasury would pay the claim.

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