Freddie Mac also said it will allow renters to remain in their homes even if their landlord enters foreclosure. The McLean, Va.-based company currently has about 8,500 properties in the foreclosure process, but many of those are vacant.

“Keeping foreclosed properties occupied and in better repair will support local property values and promote a faster recovery in the housing market,” said Freddie Mac Chief Executive David Moffett.

Fannie Mae, which announced similar plans earlier this month, said it has stopped about 20,000 foreclosure sales and halted 6,300 evictions of owners or renters this winter.

Under Freddie Mac’s new policy, tenants and former property owners need to demonstrate that they have enough income to pay the rental bill. Freddie Mac also said it would consider reinstating a mortgage for those borrowers who can qualify for a modified loan.

Washington-based Fannie Mae and Freddie Mac were taken over by the government in September after mounting mortgage losses put them in distress that was a prelude to the broader financial crisis that hit Wall Street last year. Fannie and Freddie combined own or guarantee about half of the $10.6 trillion in outstanding U.S. home loan debt.

Both Fannie Mae and Freddie Mac also said Friday they would extend a previously announced suspension of evictions through the end of February.

However, Freddie Mac hasn’t explained how tenants will be notified of the policy and hasn’t committed firmly enough to halting evictions, said Amy Marx, a staff attorney at Connecticut-based New Haven Legal Assistance.

“The only thing that Freddie Mac has agreed to do is to not send the sheriff to forcibly remove tenants,”

Loans made under the FHA’s HOPE for Homeowners Program have some special restrictions.  If you refinance your home through this program:

  1) You must share equity and future appreciation as described below.

  2) You cannot take out a second mortgage, home equity loan, or home equity line of credit for the first five years you have your new loan, except under certain circumstances for emergency repairs.

  3) You will pay an upfront mortgage insurance premium of 3% and a 1.5% annual mortgage insurance premium on the current principal balance of the new mortgage.  The annual premium will be included in your monthly payments.

If you refinance your home through this program you will not owe any payments, fees, penalties or other debt on your existing mortgage(s).

Equity and Appreciation Sharing Requirements

§    You agree to share both the initial equity created at the beginning of this mortgage and any future appreciation in the value of your home with FHA.  Initial equity is the difference between the appraised value of the home at the time of the new FHA loan and the original balance on your FHA mortgage.  Appreciation is the growth, if any, in the appraised value of the home between the time you take out the FHA mortgage and the time you sell your home.

§    You will share the newly created equity with FHA, if you sell or refinance your home, as follows:

During year 1              100% of the initial equity is paid to FHA

During year 2              90% of the initial equity is paid to FHA

During year 3              80% of the initial equity is paid to FHA

During year 4              70% of the initial equity is paid to FHA

During year 5              60% of the initial equity is paid to FHA

After year 5                  50% of the initial equity is paid to FHA

§    When you sell your home, you will also share with FHA one half (50%) of any appreciation created since the time you took out this loan.

§    For an example of how this works, see the “Example of How Equity and Appreciation Are Shared.”

HOPE for Homeowners

Example of How Equity and Appreciation Are Shared

This is an example of how the unique equity and appreciation sharing elements of this program work.  Keep in mind that this is only one example, and your actual experience will depend on many things, including how much your home increases or decreases in value.  Additional examples and details about how the equity and appreciation in your home is calculated can be found at www.hud.gov.

In this example, you and the FHA share this $20,000 when you sell your home or refinance your loan.  Here’s how that $20,000 would be split:

If you sell or refinance:

In addition to this equity sharing, you will have to share any future home price appreciation with the FHA.  This means that, if your home has gone up in value between the time you receive your FHA mortgage and the time of your home sale (or other disposition), you will share the amount of this increase with the FHA (less closing costs and a portion of any improvements you have made).  This is a 50/50 split that does not change over time.  For example if[1]:

In this example, you would keep half of this, or $25,000.  The FHA would also receive half, which is also $25,000.

Again, keep in mind that this is just one example, and your actual experience will vary depending on factors such as:  How much your home is worth when you get a new HOPE for Homeowners loan, how long you stay in your home, and how much your home is worth when you sell.

NOTE: Homeowners, contact your existing lender and/or a new lender to discuss how you may qualify for the H4H program.

The HOPE for Homeowners (H4H) program was created by Congress to help those at risk of default and foreclosure refinance into more affordable, sustainable loans. H4H is an additional mortgage option designed to keep borrowers in their homes.

The program is effective from October 1, 2008 to September 30, 2011.

As many as 400,000 homeowners could avoid foreclosure through this program over the next three years. If you are having trouble making your mortgage payments, HOPE for Homeowners may be able to help you, by refinancing your loan into a new 30-year or 40-year fixed-rate loan with lower payments.

How the Program Works

There are four ways that a distressed homeowner could pursue participation in the HOPE for Homeowners program:

1.       Homeowners may contact their existing lender and/or a new lender to discuss how to qualify and their eligibility for this program.
 

2.       Servicers working with troubled homeowners may determine that the best solution for avoiding foreclosure is to refinance the homeowner into a HOPE for Homeowners loan.
 

3.       Originating lenders who are looking for ways to refinance potential customers out from under their high-cost loans and/or who are willing to work with servicers to assist distressed homeowners.
 

4.       Counselors who are working with troubled homeowners and their lenders to reach a mutually agreeable solution for avoiding foreclosure.
 

It is envisioned that the primary way homeowners will initially participate in this program is through the servicing lender on their existing mortgage.  Servicers that do not have an underwriting component to their mortgage operations will partner with an FHA-approved lender that does. 

Step 1:  Cost-Benefit Analysis

Lender considerations: 

Given their fiduciary responsibilities and financial obligations, lenders will assess their portfolio and perform a cost-benefit analysis to determine the feasibility of offering this program to struggling homeowners. 

1.       Affordability versus value:  lenders will take a loss on the difference between the existing obligations and the new loan, which is set at 96.5 percent of current appraised value.  The lender may choose to provide homeowners with an affordable monthly mortgage payment through a loan modification rather than accepting the losses associated with declining property values.

2.       Borrower eligibility:  Lenders that determine the H4H program is a feasible and effective option for mitigating losses will assess the homeowner’s eligibility for the program:

•  
  • The existing mortgage was originated on or before January 1, 2008;
  • Existing mortgage payment(s) as of March 1, 2008 exceeds 31 percent of the borrowers gross monthly income;
  • The homeowner did not intentionally default, does not have an ownership interest in other residential real estate and has not been convicted of fraud in the last 10 years under Federal and state law; and
  • The homeowner did not provide materially false information (e.g., lied about income) to obtain the mortgage that is being refinanced into the H4H mortgage.

Consumer considerations:

The lender will disclose to the homeowner the benefits of the program:

• Home retention,
• New affordable mortgage based on current appraised value,
• 3.5 percent equity

The lender will also disclose to the homeowner the costs of the program:

• 3 percent upfront mortgage insurance premium and a 1.5 percent annual premium,
• Equity and appreciation sharing with the Federal government, and
• Prohibition against new junior liens against the property unless they are directly related to property maintenance.

Step 2:  Negotiations Between Borrowers and Lien Holders

If the lender refinancing the loan does not hold the senior mortgage lien, it will need to secure an agreement from the existing lien holder to waive all prepayment penalties and default fees on the existing loan and accept the loan proceeds from the H4H loan as payment in full.  The loan amount (including the 3 percent UFMIP) for the new H4H loan cannot exceed 96.5 percent of the current appraised value of the property.

The lender will engage existing subordinate mortgage lien holders to extinguish all subordinate liens on the subject property.  To entice subordinate lien holders to participate in the negotiation process and release their liens, FHA has the authority to share its future appreciation entitlement with them.

Step 3:  Originating an H4H Mortgage

The lender will qualify the homeowner for the new H4H mortgage using the guidelines established under the terms of the program’s unique statutory requirements, ensuring the homeowner has the capacity to make the new payment on the H4H mortgage in a timely manner.

During underwriting of the loan, the lender will calculate the future appreciation interest amount for each subordinate lien holder in accordance with instructions provided by FHA.

At settlement, subordinate lien holders will receive a certificate that evidences their interest as an obligation backed by HUD, with payment conditional on the value of HUD’s appreciation share.

Following funding of the loan the lender will record – in addition to the typical security instrument and note for the first mortgage – a shared equity note and mortgage (SEM) and a shared appreciation note and mortgage (SAM).  These mortgages will be serviced by FHA.

The lender will also submit the new mortgage for insurance to FHA, certifying that it has been originated, underwritten and closed in accordance with the H4H program guidelines.

Step 4:  Fulfilling H4H Mortgage Obligations

Upon sale of the property, the homeowner will use their sale proceeds to pay off the H4H mortgage as well as the shared equity and shared appreciation mortgages.

FHA will provide instructions to the settlement agents regarding subordinate lien holders who are entitled to a portion of any appreciation.  The lien holder that previously held the highest priority will receive payment up to the full dollar amount of its interest, not to exceed the amount of available appreciation, and so on, until all prior lien holders are satisfied or the amount of available appreciation is exhausted.  All remaining appreciation is remitted to FHA.

In instances where the homeowner failed to make the first payment on their new H4H mortgage, the H4H statute prevents FHA from paying claim benefits to anyone holding the mortgage.

“With this settlement, homeowners will receive direct relief from the catastrophic damage caused by Countrywide,” said Attorney General Brown. “Countrywide’s lending practices turned the American dream into a nightmare for tens of thousands of families by putting them into loans they couldn’t understand and ultimately couldn’t afford.”

The Countrywide settlement will likely become the largest predatory lending settlement in history, dwarfing the nationwide $484 million settlement with Household Finance Corporation in 2002, under which California received approximately $91 million.

The settlement marks a swift resolution of the Attorney General’s June 30, 2008 lawsuit alleging that Countrywide, the nation’s largest mortgage lender prior to its July 2008 acquisition by Bank of America, deceived borrowers by misrepresenting loan terms, loan payment increases, and borrowers’ ability to afford loans.

In a nutshell, this settlement will enable eligible subprime and pay-option mortgage borrowers to avoid foreclosure by obtaining a modified and affordable loan. The loans covered by the settlement are among the riskiest and highest defaulting loans at the center of America’s foreclosure crisis. Assuming every eligible borrower and investor participates, this loan modification program will provide up to $3.5 billion to California borrowers as follows:

• Suspension of foreclosures for eligible borrowers with subprime and pay-option adjustable rate loans pending determination of borrower ability to afford loan modifications;

• Loan modifications valued at up to $3.4 billion worth of reduced interest payments and, for certain borrowers, reduction of their principal balances;

• Waiver of late fees of up to $33.6 million;

• Waiver of prepayment penalties of up to $25.6 million for borrowers who receive modifications, pay off, or refinance their loans;

• $27.9 million in payments to borrowers who are 120 or more days delinquent or whose homes have already been foreclosed; and

• Approximately $25.2 million in additional payments to borrowers who, in the future, cannot afford monthly payments under the loan modification program and lose their homes to foreclosure.

More specifically, the modification program covers subprime and pay-option adjustable-rate mortgage loans in which the borrower’s first payment was due between January 1, 2004 and December 31, 2007. The program will be available for loans in default that are secured by owner-occupied property and serviced by Countrywide Financial or one of its affiliates. In addition, the borrower’s loan balance must be 75% or more of the current value of the home, and the borrower must be able to afford adjusted monthly payments under the terms of the modification.

The terms of the modification will vary based on the type of loan, including:

• “Pay-option ARM loans,” in which loan balances increase each month if a borrower makes only a minimum payment. Borrowers may be eligible to have their principal reduced to 95% of their home’s current value and may also qualify for an interest-rate reduction or conversion to an interest-only payment.

• Subprime adjustable-rate loans, such as 2/28 loans. Borrowers may have their interest rate reduced to the initial rate. If the borrower still cannot afford it, the borrower may be eligible for further interest-rate reductions to as low as 3.5%.

• Subprime fixed loans. Borrowers may be eligible for interest-rate reductions.

• “Hope for Homeowners Program.” If they qualify, some borrowers may be placed in loans made through this federal program.

• Alt-A and prime loans. Borrowers who are in default, but have Alt-A and prime loans, may also be considered for modifications, depending on circumstances.

In addition to the settlement’s direct relief to borrowers, Bank of America, who negotiated the settlement with the Attorney General following its acquisition of Countrywide, has agreed that it will suspend offering, under its own name or through Countrywide, subprime loans or loans that can negatively amortize. The bank has significantly restricted the circumstances under which it will make so-called “no doc” or low-documentation loans, in which borrowers do not fully document their ability to repay their mortgages.

In addition to California, attorneys general in 10 states, including Arizona, Connecticut, Florida, Illinois, Iowa, Michigan, North Carolina, Ohio, Texas and Washington, are participating in the settlement. Attorney General Brown’s office, along with the Office of the Illinois Attorney General, led the negotiations for the states. The Countrywide parties to the settlement include parent Countrywide Financial Corporation, Countrywide Home Loans and Full Spectrum Lending.

Attorney General Brown added, “Unlike last week’s congressional bailout, this loan-modification program provides real relief for borrowers at risk of losing their homes. Tragically, California and the other states have had to step in because federal authorities shamelessly failed to even minimally regulate mortgage lending.”

The settlement does not include Angelo Mozilo, the former Chairman and Chief Executive of Countrywide Financial Corporation or David Sambol, formerly the President of Countrywide Home Loans and the President and Chief Operating Officer of Countrywide Financial Corporation. Brown will continue to prosecute his case against Mozilo and Sambol.

Act quickly. If you are several months behind on your loan, a default notice will soon be on its way. If it has already come, you must take action immediately. Time is not on your side.

Rate reduction expected
Dean Baker, an economist with the Center for Economic and Policy Research, a think tank in Washington, D.C., says, “I think that the immediate impact will be somewhat positive. You’ll see some drop in mortgage rates because it’ll decrease the uncertainty” that had pushed mortgage rates up this summer.

Why rates should fall
Mortgage rates are expected to fall because the Treasury Department will buy mortgage-backed securities. Here’s why rates would fall as a result of the Treasury buying mortgage-backed securities:

When investors buy bonds, they have a wealth of choices. They can buy U.S. Treasury bills and notes, or corporate debt, or bonds from state and local governments. Or they can buy mortgage-backed securities, which behave much like bonds. Mortgage-backed securities are known as MBS in industry shorthand.

Fannie and Freddie guarantee the mortgage-backed securities that they issue, and those securities are deemed quite safe as investments. Not as safe as Treasury notes, but relatively safe. Fannie and Freddie are government-sponsored enterprises, or GSEs, and for decades they had implicit government backing. That backing is now explicit.

In the past few months, investors have rushed to the safety of Treasury notes and haven’t been as eager to buy mortgage-backed securities. The lessened demand caused the prices of mortgage-backed securities to go down. When bond prices fall, bond yields rise, and that’s what happened with mortgage-backed securities. As yields went up, so did mortgage rates. The difference, or spread, widened between Treasury yields and mortgage-backed securities.

Now that the Treasury will buy mortgage-backed securities, their prices should rise because of the greater demand. (The same thing would happen if the federal government bought, say, boxcar loads of sugar. You would expect sugar prices to go up.) When bond prices rise, yields drop — so mortgage rates should follow.

Lockhart, whose department will run Fannie and Freddie, describes this succinctly when he says, “As the GSEs have grappled with their difficulties, we’ve seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. (The) Treasury will begin this new program later this month, investing in new GSE MBS.”

Jumbo rates stay up
The government’s action will have a beneficial effect on some mortgages, but not all. It will have little or no impact on jumbo mortgages — home loans for large amounts. (The definition of a jumbo loan varies, depending on house prices in each metro area. A jumbo is a loan of more than $417,000 in much of the country, and is higher in more expensive housing markets — up to $729,750 in places such as Los Angeles.)

Because they are perceived as riskier, rates on jumbo mortgages have been unusually high for the last year. Historically, jumbo rates had hovered about a quarter of a percentage point above the rates for mortgages backed by Fannie and Freddie. Now they’re about a full percentage point higher, and that gap is unlikely to fall soon.

The government’s bailout of Fannie and Freddie won’t affect rates on home equity loans or home equity lines of credit, either.

A “short pay-off” or “short sale” is a transaction in which a lender agrees to accept less than it is owed to permit a sale of the property which secures its note. (Throughout this article, the term “lender” or “lenders” refers to the collection of institutions aligned on the “lender’s” side, which might include the holder of the note, a loan servicer, and a private mortgage insurance company.) HUD seems to call these sales “Pre-Foreclosure Sales.”

In a typical short pay-off, the lender agrees to accept the net proceeds from the closing (the sales price, minus the cost of closing the transaction, including your commission), perhaps with some additional consideration from the seller (such as a promissory note) in exchange for releasing its lien. Lenders do not agree to short pay-offs to be generous. In negotiating the short pay-off, the lender needs to be convinced that it will come out better than it would by foreclosing on the property and pursuing the seller/borrower for its losses. Though short pay-off procedures vary somewhat from lender to lender, most lenders need to be convinced of the following:

1. The sales price under the proposed contract is equal to or higher than the amount for which the lender would be able to sell the property after a foreclosure. The lender will require a market analysis from the REALTOR® listing the property. The lender will often confirm the market analysis by contacting its own sources, such as an appraiser or the real estate agents which handle its REO sales.
2. The commission under the proposed transaction is equal to or less than the commission it would pay its agent for selling the property after foreclosure. The lender will want to know as precisely as possible the amount of proceeds it can expect to receive from the sale. The more precise the estimate, the better.
3. The lender will want an explanation of the circumstances which created the need for the short pay-off transaction. Common explanations include divorce, medical problems, death, birth of a child taking one wage earner out of the work force, birth of children making the existing home too small, loss of a job, or a job transfer creating the need for a move.
4. That the seller doesn’t have the money to make up the shortfall on their own. To verify the financial condition of the seller/borrower, the lender will require: financial statements showing the seller’s assets, liabilities, income, and expenses; the seller’s tax returns for the previous two years; and the seller’s paycheck stubs for the most recent pay periods. The most common disputes which arise in short payoff sales concern the seller’s financial condition. On the one hand, the lender will be reluctant to approve a compromise without having the ability to analyze the financial strength of your seller. On the other hand, if this information is provided, there are potentially grave consequences for your seller if a short pay-off is not approved. The lender will have a significantly easier time pursuing your seller for a post-foreclosure deficiency. In certain circumstances, providing the financial information actually decreases the likelihood of closing on the short pay-off.

A borrower with minimal assets, little income, and a willingness to file bankruptcy has little to lose by providing financial information. However, most candidates for short pay-offs have some assets, a good job with garnishable wages, or a desire to avoid bankruptcy. Candidates for short pay-offs need legal advice regarding the advisability of submitting financial information to the lender. Though a refusal to submit financial information to a lender greatly decreases the chances of closing, a refusal to submit financial information does not necessarily preclude closing on a compromise sale.

Short Pay-Off Traps

When working on short pay-offs, certain issues and problems frequently arise. It is important to keep them in mind as you proceed.

Your seller is already facing a potential deficiency lawsuit from its lender; he does not want to be sued by a buyer also. A seller’s ability to close on a compromise sale is not within his control. It is important that in any contract which your seller accepts, his obligation to close is contingent upon successful negotiations with the lender.

Most sellers would like to protect their credit rating as much as possible. A substantial motivation for a short pay-off as an alternative to simply allowing the property to go into foreclosure is avoiding the detrimental credit consequences of a foreclosure. The seller should be advised to seek legal counsel regarding steps which can be taken to ameliorate the credit consequences of the work-out.

It is unlikely that your seller will receive any proceeds from the closing on a compromise sale. Yet the closing is likely to force the seller to move. If the seller hasn’t already moved, or doesn’t have some other reason to move, closing on a short-pay might actually hurt the seller. The dawning realization of being homeless might make a short pay seller back out of a closing. Because the foreclosure process generally takes five or so months to run, it might be in the best interest for some owners to live in their home until the end of their redemption period in the foreclosure. Don’t embark on a short-pay transaction unless the seller has already moved out of the property or unless the seller has made an informed decision to move out earlier than he would otherwise need to do so.

These transactions often require a patient buyer. Working through the bureaucracy of the loan servicer, the investor, and the private or public mortgage insurance company takes time. Closing dates may need to be extended. It is important to work with buyers who have flexible closing needs and flexible dispositions.

As many as three entities may be involved on the lender’s side of a short pay-off transaction. It is not unusual for the mortgage insurance company, the investor, and the loan servicer to have several different departments working on the transaction. Errors may arise simply due to bureaucratic miscommunication. It is important to get the terms of the short pay-off transaction (release of liability, no adverse credit consequences … etc.) in writing.

You may occasionally run into a seller who initially does not care about the financial or the credit consequences of a short pay-off transaction because he has filed, or is about to file, bankruptcy. While this may seem to be a blessing, it should raise concern. Bankruptcy affects the seller’s ability to convey title and may disrupt a transaction which you have worked long and hard to put together. A seller filing bankruptcy will usually already have legal counsel. In these circumstances, the REALTOR®; needs legal advice.

A seller who has little concern for the financial and credit consequences of a short pay-off has little incentive to avoid these consequences. Often these sellers seem to be very agreeable until they realize that they will need to move out of the property sooner than if the property went into foreclosure These sellers may decide to let the foreclosure run its course, rather than close on a compromise sale.

Short pay-off transaction may involve the forgiveness of debt which may create detrimental tax consequences to the seller. While residential short pays rarely create capital gains problems for their sellers, a commercial short-pay is likely to cause a recapture problem for a seller. Sellers should consult their tax advisors.

Keeping the above factors in mind should increase your chances of successfully closing on short pay sale.