Mortgage Refinancing to Avoid Foreclosure: The HOPE for Homeowners Act

The HOPE for Homeowners Act helps owners at risk of foreclosure to refinance their mortgages.

In July 2008, the federal HOPE for Homeowners Act was enacted. This Act created a program designed to help homeowners who are considered to be at risk for foreclosure. Homeowners who qualify will be able to refinance their currently unaffordable variable rate mortgages into affordable 30-year fixed rate mortgages insured by the Federal Housing Administration (FHA), if their lenders agree to participate.

Overall, this new program will support the refinancing of loans up to an aggregate value of $300 billion. The government estimates that between 300,000 to 400,000 homes may be saved from foreclosure through this program. However, the government's estimates may be premature a number of unresolved factors make it tough to accurately predict how effective the program will be.

Lender Agreement Is Voluntary

The biggest unknown factor in the success of this program arises from the fact that lenders aren't obligated to participate. For it to work as intended, lenders must be willing to accept buyouts of their loans that will provide the lender with 90% or less of the current appraised value of the home.

Here's how this would work:

Megan and Preston own a home that is currently appraised at $350,000. They bought the home for $500,000 and owe $480,000 on a variable rate loan. They'd like to take advantage of the HOPE for Homeowners program and convert their mortgage into an FHA insured 30-year fixed rate mortgage. In order to do this, their lender must agree to cash out the $480,000 mortgage for 90% of the home's appraised value, or $315,000, which is less than two thirds of the mortgage debt.

The lawmakers who passed this bill are betting that lenders will agree to participate rather than pay the steep price typically associated with foreclosures. But here are some reasons that this incentive may not always work:

• Up to now, most lenders have opted to foreclose rather than to voluntarily modify their loans downwards to the property's fair market value.
• It's difficult to accurately appraise property in a declining real estate market. Lenders may rightly view appraisal with a high degree of skepticism and prefer to take their chances in a foreclosure auction.
• Because of the steep decrease in home values in many parts of the country (as much as 50% in some areas), lenders in these areas may flat out refuse to take such a huge loss.
• Second and third mortgage holders, who are likely to get pennies on the dollar, may be reluctant to agree to the refinanced loan (for details, see "Subordinate Mortgage Holders Must Agree," below).

Subordinate Lender Agreement Is Voluntary

In order for the refinancing program to work, not only the primary lenders, but also the holders of second or third mortgages, will have to sign off on the deal and there's nothing forcing them to do so. They're only likely to take this step if:

• the original lender is willing to share the proceeds of the refinanced loan with them, or
• the property has sufficient value to support payment of both the original lender and them.

The authors of the Act recognized that getting subordinate mortgage holders to agree to the refinanced loan will often be difficult. To facilitate agreement, the FHA oversight board will coordinate negotiations between the original mortgage holder and the subordinate mortgage holders. Still, if the subordinate mortgage holders have to accept pennies on the dollar (if that), they can simply say "no" to the refinancing.

Future Home Appreciation Must Be Shared With Feds and Lenders

Homeowners who receive refinancing under the HOPE for Homeowners program will be required to share a portion of any future appreciation in home value with the federal government. In other words, if you sell or refinance your home, you may have to send some of the profits to the feds.

The amount will range from 100% to 50%, depending on when the property is sold or refinanced. In addition, any second or third mortgage holder that agrees to the refinance at a loss to itself may be entitled to share in the appreciation, depending on a number of factors to be developed by the FHA oversight board.

Who Will Qualify for the Program

Not everyone will qualify for refinancing under this program. The final details of who will and won't qualify are yet to be determined. The statute itself provides some core eligibility rules, but the new FHA governing board will need to issue standards for the implementation of these rules, including the ultimate criteria for deciding who qualifies and who doesn't.

Here are the main requirements provided by the Act itself.

The homeowner must be "at risk" of foreclosure. The HOPE for Homeowners program is designed for people who are at risk of foreclosure. The Act uses the "debt-to-income ratio" method to determine who is at risk. That means your monthly mortgage debt load would need to have been at least 31% of your monthly gross income as of March 1, 2008.

Example:

As of March 1, 2008, Ben had a monthly mortgage debt of $2,000. He would need a monthly gross income of less than $6,500 to hit the 31% debt to income ratio. If Ben's income were $8,000 a month, his mortgage debt-to-income ratio would be 25% and he would not qualify for the program.

The Act provides that the FHA's newly created oversight board may set an even higher debt-to-income ratio, meaning that the number of borrowers considered "at risk" may ultimately be smaller than originally set forth by the Act itself.

Proof of income. To participate in this program, you will have to produce income tax returns for the previous two years, in addition to other documentation of your income. Your income will have to be adequate to make the new loan affordable under standards set out in the National Housing Act (essentially debt-to-income ratios). ( To learn more about mortgage affordability, read Nolo's article When Foreclosure Threatens: Can You Afford to Keep Your Home?)

Primary residence. You must be living in your primary residence to qualify for refinancing under this program. Also, you can't own any other real estate. Homeowners who also own second homes or rental properties are out of luck.

Virtue counts. To obtain refinancing under this program, you must certify under penalty of perjury that:

• you haven't intentionally defaulted on the mortgage or any other debt, and
• you didn't knowingly furnish false material information when you obtained the mortgage you are trying to refinance (for instance, you didn't deliberately overstate your income).

The goal of the certification is to separate the sincere and innocent homeowners from those who played fast and loose with the home-financing system during the boom years, and to weed out people who deliberately put themselves into a position to qualify for the new refinancing program.

But, despite the best intentions of Congress, this certification process probably won't disqualify you from the program even if you acted somewhat recklessly when financing your home. There is no provision for a case-by-case assessment of an applicant's past virtue. Also, of course, one's person's recklessness is another person's lifeline for medical treatment or a source for mortgage payments because of a lost job.

Getting Help From a Nonprofit Housing Counselor

The U.S. Department of Housing and Urban Development (HUD) has certified a national network of nonprofit housing counselors for the purpose of providing homeowners with accurate information at little or no cost regarding their mortgage difficulties. These counselors can be counted on to understand the ins and outs of the HOPE for Homeowners Program. For a list of these counselors, see HUD's website at www.hud.gov (click on "Avoid Foreclosure" under the Homes column) or call 800-569-4287.

If you believe that you're at risk of defaulting on your mortgage payments, you should immediately contact one of these counselors to discuss your options both under the new Act and under existing techniques for avoiding foreclosures. (You can find other ways to avoid foreclosure in Nolo's article How to Stop Foreclosure.)

To learn how to survive or even prevent foreclosure, get The Foreclosure Survival Guide, by Stephen Elias (Nolo).