Obama Administration Approves State Plans for Use of 1.5 Billion Dollars in ‘Hardest Hit Fund’ Foreclosure-Prevention Funding
June 24, 2010—State Housing Finance Agencies (HFAs) in Arizona, California, Florida, Michigan and Nevada can begin to use $1.5 billion in “Hardest Hit Fund” foreclosure-prevention funding under plans approved recently by the Obama Administration. This aid will support innovative local initiatives to assist struggling homeowners in those states, as part of the first round of funding available under this new program.
“These states have identified a number of innovative programs that will make a real difference in the lives of many homeowners facing foreclosure,” said Treasury Assistant Secretary for Financial Stability Herbert M. Allison, Jr. “While we’ve made important progress stabilizing the housing market and keeping responsible families in their homes, the Obama Administration will continue to do everything it can to help those who are struggling the most during this difficult time. Today marks an important milestone for delivering relief to homeowners through the Hardest Hit Fund program.”
President Obama established the Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (“Hardest Hit Fund”) in February 2010 to provide targeted aid to families in the states hit hardest by the housing downturn. The states approved to receive aid as part of the first round of funding provided through this program each experienced a 20% or greater decline in average housing prices.
Each state Housing Finance Agency (HFA) gathered public input and created Hardest Hit Fund programs designed to meet the unique challenges facing struggling homeowners in their respective housing markets. The five HFAs submitted their Hardest Hit Fund proposals to Treasury on April 16. Treasury then reviewed each state’s proposals to ensure compliance with the Emergency Economic Stabilization Act (EESA) and offered technical assistance to develop performance and reporting metrics. Approved states will now begin to set up and roll out their specific Hardest Hit Fund programs in order to provide relief to struggling homeowners as soon as possible, with specific implementation timing depending on the types of programs offered, specific state-level procurement procedures and other factors.
The proposals include programs to assist struggling homeowners with negative equity through principal reduction; assist the unemployed or under-employed make their mortgage payments; facilitate the settlement of second liens; facilitate short sales and/or deeds-in-lieu of foreclosure; and assist in the payment of arrearages.
In March 2010, the Obama Administration announced a second round of Hardest Hit Fund aid totaling $600 million for five additional states with high areas of concentrated unemployment: North Carolina, Ohio, Oregon, Rhode Island and South Carolina. The proposals that these states submitted are currently being reviewed.
A state-by-state summary of the Hardest Hit Fund proposals is available below.
Arizona ($125.1 million)
-Arizona will provide assistance in the form of principal reduction, interest rate reduction, and/or term extension programs with the goal of allowing borrowers to enter into a permanent modification program.
-In circumstances where a second lien is prohibiting modification of a first lien, the state will provide assistance toward elimination of the second lien.
-The state will also offer assistance to the under-employed while they seek new employment. This assistance may be used to pay monthly mortgage payments or remove second mortgages where that second lien is prohibiting the modification of a first lien.
California ($699.6 million)
-California will provide assistance to reduce principal with earned principal forgiveness.
-The state will also target funds to address delinquent loan arrearages.
-California will offer a mortgage payment subsidy to unemployed families.
-Provide funds to assist families that have executed a short sale or deed-in-lieu of foreclosure transition to a stable housing situation.
Florida ($418 million)
-Florida will offer mortgage payment assistance to the unemployed and under-employed while they seek re-employment.
-The state will also offer principal reduction or second lien extinguishment if necessary to achieve a mortgage modification.
Michigan ($154.5 million)
-Michigan will subsidize an unemployed borrower’s mortgage payments while they search for employment.
-The state will assist with loan arrearages for those who can sustain homeownership and have undergone a financial hardship.
-The state will assist homeowners with negative equity through earned principal forgiveness.
Nevada ($102.8 million)
-Nevada will create a mortgage modification program using a combination of forgiveness and forbearance with a goal of reducing principal to less than 115% of LTV (loan-to-value) and lowering payments to 31% of DTI (debt-to-income).
-The state will also offer assistance to reduce/eliminate second liens with earned forgiveness over a three-year term.
-Additionally, the state will provide allowances for appraisal and transaction fees, moving fees, a legal allowance for up to three months, and a combination of incentives for borrowers and servicers to facilitate short sales.
For more information, visit www.financialstability.gov.
Obama Administration Supports Additional Funding to Stabilize Neighborhoods Hard-Hit by Foreclosure
May 20, 2010—U.S. Housing and Urban Development (HUD) Secretary Shaun Donovan announced that the Obama Administration will work with Congress to find ways to help state and local governments more effectively combat the ongoing effects of the housing crisis and home foreclosures through additional funding for the Department’s Neighborhood Stabilization Program (NSP) and foreclosure prevention counseling. Donovan made the announcement at a roundtable with Washington, D.C.-based reporters sponsored by the Christian Science Monitor.
The Administration also announced plans to reallocate funds awarded through NSP1 that have not yet been committed to specific projects, in order to drive more funding to hardest hit communities. HUD has already awarded nearly $6 billion in NSP grants to help state and local governments respond to rising foreclosures and falling home values: $4 billion funded NSP1 through the Housing and Economic Recovery Act of 2008 (HERA); and, an additional $2 billion funded NSP2 through the American Recovery and Reinvestment Act of 2009 (Recovery Act). The initial NSP1 funds provided each state government with a “base allocation” of $19.6 million, without regard to varying degrees of need. Eighteen months later, the Department will recapture money from communities that have not yet committed NSP1 funding, and reallocate it to city and county governments with very high foreclosure and/or vacancy rates and their jurisdiction, based on more recent data.
Additionally, the Administration plans to work with Congress on new foreclosure counseling efforts to help homeowners facing foreclosure stay in their homes. HERA provided $150 million for housing counseling to connect homeowners with their mortgage servicer or lender to explore options that will keep them in their homes as a result of these counseling funds. Additional funds in this area would broaden the Administration’s reach in its ongoing foreclosure prevention efforts.
“Through HUD’s recapture process, the Administration is working to use the resources we have already received and build on the success and lessons from NSP1 and NSP2, ideally with additional funding for a third round, to really target the recovery in hard hit areas directly,” said HUD Secretary Shaun Donovan. “The recapture process would provide additional resources to areas based on their foreclosure and delinquency rates, vacancy problems and unemployment. We also want to go a step further by providing funds to help homeowners avoid foreclosure.”
The Neighborhood Stabilization Program was created to address the housing crisis, create jobs, and grow local economies by providing communities with the resources to purchase and rehabilitate vacant homes. The NSP grants that HUD has awarded are helping state and local governments, as well as non-profit developers acquire land and property; demolish or rehabilitate abandoned properties; and/or offer downpayment and closing cost assistance to low- to middle-income home buyers. Grantees can also stabilize neighborhoods by creating “land banks” to assemble, temporarily manage, and dispose of foreclosed homes. So far, over 63,000 homes are projected to be impacted by NSP1, including acquisition, demolition, home buyer assistance and new construction, and over 17,000 units have been completed. For NSP2, applications were submitted for over $15 billion worth of projects nationwide, with only $2 billion available for funding.
“Both the reallocation of NSP1 funds and a third round through NSP3 would help to expand efforts to clear blighted properties, like those in Detroit where I visited last month,” Donovan added. “Detroit is demolishing 10,000 properties over three years, with the first two years funded by NSP. A third round of funding could help complete projects like the one in Detroit.”
HUD plans to explore with Congress a number of technical changes that could improve the flexibility and impact of the NSP program if a third round of funding can be secured. HUD will also work with Congress to help local grantees access more of the administrative capacity needed for effective implementation and, as part of this effort, to secure additional funds for technical assistance (TA) as well.
Local communities would design and set their own program targets, but HUD would provide options for implementation. To ensure best use of taxpayer dollars, grantees would, based on NSP1 performance, either be required to: work with a subgrantee – an entity that is granted the legal obligations and authority to implement NSP on behalf of the grantee; sign a Technical Assistance agreement with HUD; or, work in a consortium with a high capacity lead grantee.
In order to reallocate NSP1 funding, HUD would follow guidelines set forth in HERA, which says that states and units of general local government have no more than 18 months to dedicate NSP1 funds to specific projects. The Department estimates that 70% of the $3.9 billion in NSP1 funds would be obligated by the 18-month deadline this fall, in September and October 2010, for a recapture of approximately $1 billion. Following a 30 day review period, funds that grantees have not yet committed to specific projects will be reallocated either to new grantees or as additional funds for first round grantees.
“HUD is committed to helping local communities recover from the blight and vacancies that have become visual symbols of difficult economic times,” said Donovan. “We have much more work to do to mitigate the impacts that foreclosures have had on local communities; however, innovative collaborations between local government, housing agencies, and non-profits and creative, green-focused uses of federal funds will create jobs and put us on the path to recovery.”
For more information, visit www.hud.gov.
Ambitious Foreclosure Plan Revealed - How Will It Help?
The Obama administration on Wednesday detailed its ambitious $275 billion plan to halt soaring foreclosures nationwide, outlining the financial incentives it’s offering investors, lenders and their bill collectors to lure them into modifying distressed mortgages to keep Americans in their homes. The slump in home prices is the root cause of the global financial meltdown, so the success or failure of the administration’s housing plan is vital to ending the deepening economic recession.
Shortly before financial markets opened, the Treasury Department provided its long-awaited update to the Making Home Affordable program, which the administration thinks can help up to 9 million homeowners.
“It’s a major break with the past because it really takes up a multifaceted approach. It used several different carrots and a stick to come at a comprehensive plan to reduce the number of foreclosures,” said Kathleen Day, a spokeswoman for the advocacy group Center for Responsible Lending in Durham, N.C. “That’s the only way you’re going to stabilize the financial system.”
The plan’s details came out a day before the House of Representatives is expected to pass compromise legislation giving bankruptcy judges power that they now lack to modify the terms of certain mortgages. Bankruptcy changes are the stick to go along with the carrots-new financial incentives for lenders to modify mortgages instead of moving to foreclosure.
The Obama housing plan attacks two problems that are creating a vicious cycle in the nation’s housing market.
First, it offers $200 billion to provide refinancing for some homeowners who owe more than their homes are now worth-shorthanded as being “underwater” on their mortgages. To qualify, these homeowners-5 million of them by administration estimates-must have their mortgages in the hands of Fannie Mae or Freddie Mac, the mortgage finance giants that the government seized last September.
“We have been advocating for one unified approach to help modify or refinance delinquent and underwater loans and thus we think this program will undoubtedly help servicers keep more at-risk borrowers in their homes, which is a crucial step to helping stabilize the mortgage and housing markets,” stated John A. Courson, president and CEO of the Mortgage Bankers Association (MBA).
Many of these homeowners would like to take advantage of today’s historically low interest rates and refinance but can’t, since the law prohibits refinancing if the current mortgages reflects less than 80% of the homes’ values. These homeowners now can seek to refinance if their mortgages are up to 5% higher than the present-day values of their homes. That helps some, but it won’t reach lots of homeowners in California, Florida and elsewhere whose homes are now worth substantially less than their mortgages.
Because most mortgages are bundled into securities and sold into a secondary market, it’s often difficult for homeowners to find out whether Fannie or Freddie owns their loans or whether they’ve been pooled with other loans and sold by an investment bank to other investors.
The other pillar of Obama’s plan attacks the problem of affordability. The administration provides another $75 billion in incentives to help prevent foreclosures in cases in which the homeowners, up to 4 million of them, are about to lose their homes. The money comes from the $700 billion bailout fund approved last October.
Under this complex portion of the plan, the president offers a stream of financial incentives to mortgage servicers, who are essentially bill collectors for private investors who own pools of U.S. mortgages. Some incentives stay with the servicers while others flow through to investors.
In exchange for the incentives, a servicer would modify a mortgage so that no more than 38% of a homeowner’s monthly after-tax income was taken by the monthly mortgage payment. The government then would step in and share the cost of reworking that mortgage so that no more than 31% of the borrower’s monthly income was tied up in the payment.
This could result in some mortgages carrying interest rates as low as 2% for five years. Critics think that this mortgage subsidy interferes with the natural process of letting the marketplace find the floor on home prices.
“Not only do these gimmicks prevent home prices from falling to the market-clearing levels that would give private lenders the confidence to loan, but the continued specter of subsequent government-mandated modification will keep lenders out of the game,” said Peter Schiff, the president of investment strategist Euro Pacific Capital.
Treasury Secretary Timothy Geithner told lawmakers Wednesday that the administration plan offers “a powerful set of incentives” and “persuasive force and some economic inducements to provide substantial improvements in affordability. With those changes you will be put in an economically viable position and stay in your home.”
Although lenders have worked over the past year to freeze mortgage rates that were about to adjust to higher monthly payments, few have been willing to take losses and significantly rework the loan terms. This has led to a high percentage of re-defaults on modified mortgages and avoided tackling the problem of affordability.
Federal Deposit Insurance Corp. Chairman Sheila Bair pushed unsuccessfully during the Bush administration to rework loans with an eye toward affordability, and the Obama administration is implementing her ideas.
Any lender that takes new taxpayer bailout money under the administration’s Financial Stability Plan will be required to participate. The Obama team also is betting that requiring a standard guideline for mortgage modification will provide more protection to mortgage servicers, who are bound by contract to investors, not homeowners, and can be sued if they modify mortgages.
The Obama plan got a strong endorsement Wednesday from the Financial Services Roundtable, which represents many of the largest mortgage lenders.
“Our member companies intend to implement the program for all at-risk borrowers consistent with program guidelines and contractual requirements,” the group said in a statement. “For the benefit of at-risk borrowers who are facing the loss of their homes, for communities and for our nation in this time of extraordinary economic challenges, it is imperative that investors and servicers that choose to participate in the program adopt a national standard model.”
In an administration background briefing that was conducted under the administration’s insistence on anonymity in order to speak freely, it was clear that the plan is far from a panacea.
Senior government and industry officials confirmed that homeowners who seek to refinance to the new low interest rates will have to foot the bill for a range of new fees that Fannie and Freddie require. It’s not clear whether these will have to be paid upfront or can be folded into the loans.
The officials also confirmed that there’s no standard procedure for lenders under the Fannie and Freddie portion of the plan. It will be up to each lender to determine whether the refinances go through them or whether mortgage brokers and other intermediaries can help homeowners seek refinanced loans under the program.
Officials were also careful to note that mortgage servicers won’t be able to modify mortgages if the terms of their contracts with the investors who own the pools of mortgages don’t allow it. That leaves matters at square one for many homeowners, since many investors, like lenders, have been reluctant to take losses in hopes of an eventual government bailout.
Officials confirmed that they have no reliable data on how many of these investors are on the other ends of contracts that prohibit mortgage modifications. That question is important, since many of the weakest loans underwritten during the height of the housing boom, from 2004 to 2006, were sold by now-defunct investment banks to investors abroad, many in Europe.
These pools of mortgages, called mortgage-backed securities, are the so-called toxic assets that are at the heart of the global banking meltdown. This unresolved question about their contract terms is relevant to recovery in housing and the financial sector.
So, who qualifies for help of what kind? Here are some answers for consumers:
Q: How do I know if I qualify?
A: Your mortgage must predate the start of 2009, you must live in the home and you’ll have to provide proof of income. Then ask two questions. First, are you already behind on payments or even in the foreclosure process? If the answer is no, then ask yourself whether your current mortgage rate is high enough to make it worth your while to refinance to take advantage of today’s low rates for 15-year and 30-year fixed-rate mortgages.
Q: That’s it?
A: No. If you think it’s advantageous to refinance, you must find out who owns your loan. Most mortgages are bundled together and sold into a secondary market, where investors technically own them. If Fannie Mae or Freddie Mac placed your loan into the secondary market, you can contact the company that sends your monthly mortgage statement to discuss the new program. If your mortgage is in the portion of the secondary market where the private sector issued the mortgage-backed securities, you don’t qualify.
Q: How do I know who owns my loan?
A: You’ll have to ask the company that sends your monthly statement. These companies are sure to be swamped with calls this week, so be patient. And be warned: Borrowers have found in the past that mortgage-bill collectors-called servicers-often are less than forthcoming with answers as to who owns the loans.
Q: What if my loan is owned by Fannie or Freddie but I have negative equity?
A: You’re not alone. Researcher First American CoreLogic reported Wednesday that one in five homeowners nationwide now owes more than his or her home is worth. To qualify under the refinance portion of the Obama plan, you can owe up to 5% more than your home is now worth. Thus, many homeowners in California, Florida, Arizona and Nevada, where home prices have plunged, won’t qualify.
Homeowners in 250 high-cost U.S. counties can seek help under either track, however, provided that they qualify, even if the mortgage is worth up to $729,750. This could help high-income homeowners in Middle America and the Northeast, where home prices haven’t fallen as much.
Q: What about those of us who are about to lose our homes?
A: A lot will depend on whether the mortgage bill collectors, the servicers, think that they have leeway from investors to modify the loans. They’re being offered an upfront fee of $1,000 and will get “pay for success” fees for three years if a borrower’s modified loan remains in good standing. They’re being offered even more fees if they get homeowners into this program before they fall behind on payments.
Q: What happens if the servicer agrees to modify my mortgage?
A: First, the servicer has to get your monthly payment down to 38% of your monthly after-tax income. It can do this by taking a loss on the loan or stretching a 30-year loan into a 40-year, for example. It’s allowed to reduce interest rates as low as 2%.
Once the 38% threshold is met, the government matches lenders dollar for dollar to get the payment even lower, to 31% of monthly after-tax income.
This percentage is calculated on the value of a first-lien mortgage. If a home carries a second lien-often called a second, or junior, lien-the servicer will get another $250 if it extinguishes the second mortgage.
Q: Is the modification a permanent fix?
A: The new interest rate would be valid for five years. Afterward, it can rise 1% a year until the lending rate hits the conforming loan survey rate at the time of the modification. Given that mortgage rates today are low by historical standards, the loan survey rate is likely to be well below the punishing adjustable rates that are at the heart of many distressed mortgages.
Q: Do lenders have to participate in Making Home Affordable?
A: If they’re getting Wall Street bailout money and hope to get any more, then they have to play ball. Many mortgage servicers are outside this realm, however, and their trade group, the American Securitization Forum, gave only lukewarm, qualified support to the Obama administration’s plan.
Q: Is there any way to force servicers to help homeowners?
A: The House of Representatives is expected to pass legislation this week that would allow bankruptcy judges to modify mortgages. This measure, which seems to have support in the Senate, too, would let judges shave off of mortgages the difference between what homeowners owe and what their homes are now worth. This would give homeowners some leverage in negotiations.
Q: But don’t these homeowners deserve what they get for overextending themselves?
A: Some think so. There are two parties to a bad deal, however-people who bought too much home and lenders who let their underwriting standards fail in lending to them. Somebody has to lose. The Obama administration is betting that keeping owners in their homes helps set a floor under prices. Critics think that only the marketplace can find a floor for home prices.
DTI Ratios: What Homeowners Need to Know
Ask homeowners about their DTI (debt-to-income) ratios, and they’re likely to respond with something like, “My what ratios?!” However, when distressed homeowners are sizing up their foreclosure options, they need to brush up on DTI ratios. Lenders will be scrutinizing these ratios to determine homeowner eligibility for loan modification and other debt relief.
Homeowners need to know that their DTI ratios are crucial to determining an affordable house payment. The current government plan defines an affordable house payment as one that is no higher than 31% of the homeowner’s front-end DTI. In other words, the house payment or PITIA (principal, interest, taxes, insurance, and any association fees) on the first mortgage cannot exceed 31% of the household’s gross monthly income.
Encourage homeowners to examine both their front-end and back-end DTI ratios:
Front-end DTI ratio is based solely on the house payment. (Under the current government plan, the front-end DTI target of 31% accounts only for the first mortgage. If the home has other liens against it, such as a second mortgage or home equity line of credit, those are accounted for separately as part of the back-end DTI.)
Back-end DTI ratio is based on all monthly debt payments combined, including the house payment, credit card payments, payments on auto loans, and other loan payments.
Calculating the Front-End DTI Ratio
Although the formulas for calculating DTI ratios are simple, homeowners are unlikely to have encountered them in the past. To calculate their front-end DTI, instruct homeowners to divide their house payment by their monthly household income (gross income):
House Payment / Gross Monthly Household Income = Front-End DTI Ratio
This is easy, assuming the monthly house payment includes an amount held in escrow to pay the property taxes, homeowner’s insurance, and any association fees. Such a payment is often referred to as PITIA (principal, interest, taxes, insurance, and association fees).
If they pay property taxes, insurance, and association fees separately, then they have to perform an extra step. Instruct them to total these additional annual expenses, divide by 12 months, and add the result to their monthly house payment (principal and interest). They can then divide the resulting house payment by their monthly household income to determine their front-end DTI ratio.
Private mortgage insurance (PMI) payments fall outside this calculation under the current government plan.
Calculating the Back-End DTI Ratio
To calculate the back-end DTI ratio, instruct homeowners to total their monthly debt payments, including: House payment or PITIA, as discussed in the previous section; Any payments on second mortgages, home-equity loans, or home-equity lines of credit; credit card payments; auto loan or lease payments; alimony and other payments on credit accounts or loans.
Now, they should divide their total monthly debt payments by their total gross monthly household income:
Monthly Debt Payments / Gross Monthly Household Income = Back-End DTI Ratio
Exploring DTI Ratios under Obama’s Foreclosure Prevention Plan
The Home Affordable Modification Program accounts for both front-end and back-end DTI ratios. When attempting to reach the 31% target for the front-end DTI, the focus is only on the first mortgage:
For qualifying homeowners, the lender will have to first reduce payments on the first mortgage to no greater than a 38% front-end DTI ratio. Treasury will match further reductions in monthly payments dollar-for-dollar with the lender/investor, down to a 31% front-end DTI ratio.
Borrowers who qualify for a modification but would have a post-modification back-end DTI ratio greater than or equal to 55%, will be provided with a letter stating that they are required to work with a HUD-approved counselor. The modification will not take effect until they provide a signed statement indicating that they will obtain counseling.
Keep in mind that only lenders, investors, and servicers who choose to participate in this program are bound by its guidelines and that the guidelines may change over time. Different lenders may have their own DTI ratio targets and limitations.
When homeowners in your market are in default or in danger of default, encourage them to explore their options. Now that they can calculate their DTI ratios, they have one more tool that will empower them to assess their options, keep their house, and preserve their American Dream of homeownership.
Ralph R. Roberts is a consumer advocate, spokesperson for Federal Loan Modification Law Center host of keepmyhouse.com, and author of numerous books, including Foreclosure Self-Defense For Dummies and Loan Modification For Dummies (Summer, 2009). Ralph is based in Sterling Heights, Michigan and can be reached at