The HOPE for Homeowners Act of 2008 and Section 109 of the Emergency Economic Stabilization Act (“EESA”) work in tandem to grant mortgage debtors substantial relief from subprime mortgages.
We have finally received the HUD regulations underpinning the HOPE as set out in the Housing and Economic Recovery Act of 2008 (“HERA”); they are listed in toto at the end of this article.
The new relief that will be issued to borrowers under HOPE, may be summarized as follows:
Summary of HOPE:
Under HOPE, new mortgages are offered by FHA-approved mortgagees to mortgagors who are at risk of losing their homes to foreclosure. The new FHA-insured mortgage refinances the borrower's existing mortgage at a significant write-down. Eligible borrowers must be unable to afford their existing mortgage payments, must occupy the residence that is the security for the refinanced mortgage as their primary residence, and may not have any present ownership interest in another residence. Investors and investor properties are not eligible for the FHA-insured refinanced mortgages. Under the Program, participating mortgagors share their new equity and future appreciation with FHA. Additionally, participation in this Program is voluntary. No mortgagees, servicers, or investors are compelled to participate. Summary of Sec. 109 Independent from HOPE, but yet designed to work with HOPE, Section 109 of EESA will provide additional relief to borrowers. Whenever the Secretary of the Treasury slows down from saving the world credit disaster, he will issue Regulations to define how Section 109 of EESA will be implemented.
Section 109 of EESA states:
SECTION 109 FORECLOSURE MITIGATION EFFORTS:
(a) Residential Mortgage Loan Serving Standards.
To the extent the Secretary acquires mortgages, mortgage-backed securities, and other assets secured by residential real estate, including multifamily housing, the Secretary shall maximize assistance for homeowners and use the Secretary's authority as investor to encourage the services of the underlying mortgages, consistent with a reasonable return to the taxpayer to take advantage of HOPE for homeowner program Section 257 of the National Housing Act or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.
The Secretary shall coordinate with the Corporation (that is, the FDIC), the Board(with respect to any mortgages held by a federal reserve bank as provided in Section 110(a)(1)(c)), the Federal Housing Finance Agency, the Secretary of HUD and other federal government entities that hold troubled assets to attempt to identify opportunities for the acquisition of classes of troubled assets that will improve the Secretary's ability to improve the loan modification and restructuring process and, where permissible, to permit bona fide tenants who are current on their rent to remain in their homes under the terms of the lease. In the case of a mortgage on residential rental property, the plan shall include protecting Federal, State and local subsidies (and generate enough funds to ensure the maintenance of the property).
(c) Consent to Reasonable Loan Modification Requests.
Upon any request arising under exiting investment contracts, the Secretary shall consent, where appropriate, and considering net present value to the taxpayer, to reasonable request for loss mitigation measures, including terms extensions, rate reductions, principal write downs, increases in the portion of loans within a trust or other structure allowed to be modified, or removal of other limitations on modifications.
[My good friend, Rick Alembik, Esq., Decatur, GA (real estate litigator extraordinaire) asked “What does “investment contract,” mean in the context of Section 109(c)? The quick federal answer appears to be: Investors sometimes pool money into a common enterprise managed for profit by a third party. This is called an investment contract. Such enterprises may involve anything from cattle breeding programs to movie productions. This is often done through the establishment of a limited partnership in which investors, as limited partners, own an interest in a venture but do not take an active management role. Some of these securities are issued primarily for purposes of reducing income tax liability. "What every Investor Should Know, " Handbook, Office of Public Affairs, Policy Evaluation and Research U.S. Securities and Exchange Commission -- July 1994.]
As of October 6, 2008, we now have ½ of the Regulation Puzzle. Some weeks or months from now, we should have the Treasury Regulations under Sec. 109. We expect that when the HOPE regulations are used in tandem with the Section 109 Regulations, very substantial relief will be afforded to subprime borrowers.
Hugh Wood, Atlanta, Georgia
& & &
The HOPE Regulations are as follows:
[Federal Register: October 6, 2008 (Volume 73, Number 194)]
[Rules and Regulations]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
Board of Directors of the HOPE for Homeowners Program
24 CFR Part 4001
HOPE for Homeowners Program: Program Regulations; Final Rule
BOARD OF DIRECTORS OF THE HOPE FOR HOMEOWNERS PROGRAM
24 CFR Part 4001
[Docket No. B-2009-F-01]
HOPE for Homeowners Program: Program Regulations
AGENCY: Board of Directors of the HOPE for Homeowners Program.
ACTION: Final rule.
SUMMARY: This final rule sets forth the core requirements for the HOPE
for Homeowners Program that have been established by the Board of
Directors (Board) of the HOPE for Homeowners Program (Program). A new
section 257 of the National Housing Act (NHA) provides the authority
for this Program and oversight requirements to be performed by the
Board. Specifically, section 257(c)(1) of the NHA requires the Board to
prescribe such regulations as may be necessary or appropriate to
implement the Program. The Board has determined that the regulations
set forth in this rule are necessary and appropriate for the
implementation and effective administration of the Program.
DATES: Effective Date: October 6, 2008.
FOR FURTHER INFORMATION CONTACT: Emmanuel Yeow, Secretary of the Board
of Directors of the HOPE for Homeowners Program, Department of Housing
and Urban Development, 451 7th Street, SW., Room 9110, Washington, DC
20410-8000, telephone 202-708-3600 (this is not a toll-free number).
Persons with hearing- or speech-impairments may access this number
through TTY by calling the toll-free Federal Information Relay Service
The HOPE for Homeowners Act of 2008, located in Title IV of
division A of the Housing and Economic Recovery Act of 2008 (HERA),
(Pub. L. 110-289, 122 Stat. 2654, approved July 30, 2008), amended
Title II of the NHA to add a new section 257. New section 257 (12
U.S.C. 1701z-22) establishes within the Federal Housing Administration
(FHA), the Program, a temporary FHA program, that offers homeowners and
existing mortgage loan holders (or servicers acting on their behalf)
insurance on the refinancing of loans for distressed mortgagors to
support long term sustainable homeownership, including among other
things, allowing homeowners to avoid foreclosure. Section 257 of the
NHA authorizes the Department of Housing and Urban Development (HUD)
acting through the FHA to insure such refinanced eligible mortgages
commencing no earlier than October 1, 2008, and such authority expires
September 30, 2011.
Under the Program, new mortgages are offered by FHA-approved
mortgagees to mortgagors who are at risk of losing their homes to
foreclosure. The new FHA-insured mortgage refinances the borrower's
existing mortgage at a significant write-down. Eligible borrowers must
be unable to afford their existing mortgage payments, must occupy the
residence that is the security for the refinanced mortgage as their
primary residence, and may not have any present ownership interest in
another residence. Investors and investor properties are not eligible
for the FHA-insured refinanced mortgages. Under the Program,
participating mortgagors share their new equity and future appreciation
with FHA. Additionally, participation in this Program is voluntary. No
mortgagees, servicers, or investors are compelled to participate.
Section 257 of the NHA prohibits the new mortgage loan insured by
FHA from exceeding 90 percent of the appraised value of the property
that is security for the mortgage, or 132 percent of the dollar amount
limitation in effect for 2007 under section 305(a)(2) of the Federal
Home Loan Mortgage Corporation Act (12 U.S.C. 1454(a)(2)) for a
property of applicable size. In addition, section 257 also provides
that the term of the FHA-insured refinanced mortgage shall have a
maturity of not less than 30 years, and must bear a single rate of
interest that is fixed for the entire term of the mortgage. Section 257
directs that a mortgagor participating in the Program may not grant a
new subordinate lien on the mortgaged property during the first 5 years
of the term of the mortgage insured under the Program, except as the
Board may determine is necessary to ensure the maintenance of property
standards, and subject to the requirements that any new outstanding
liens (1) do not reduce the value of FHA's equity in the mortgagor's
home; and (2) when combined with the mortgagor's existing mortgage
indebtedness, do not exceed 95 percent of the home's appraised value at
the time of the new subordinate lien.
The fundamental principle behind the HOPE for Homeowners Act and
this Program is that providing new equity for distressed homeowners may
be an effective way to help homeowners avoid foreclosures.
This Final Rule
Section 257(c)(1) of the NHA requires the Board to establish
requirements and standards for the Program, and prescribe such
regulations and provide such guidance as may be necessary or
appropriate to implement such requirements and standards.\1\ In
addition to this broad direction to establish requirements and
standards for the Program, section 257 also outlines specific areas for
which the Board is charged with establishing standards and policies for
\1\ The Board is composed of the Secretary of HUD, the Secretary
of Treasury, the Chairman of the Board of Governors of the Federal
Reserve System, and the Chairperson of the Board of Directors of the
Federal Deposit Insurance Corporation, or their respective
designees. Section 257(t) of the NHA also provides that the Board
may ``prescribe, amend, and repeal such bylaws as may be necessary
for carrying out the functions of the Board.'' Consistent with this
provision, the Board adopted bylaws regarding its organization,
staffing, and operational procedures. These bylaws were published in
the Federal Register on September 4, 2008 (73 FR 51621) and provide
that the Board's principal place of business is 451 7th Street, SW.,
Washington, DC 20410-0500.
This final rule provides the core requirements that the Board has
determined are necessary and appropriate for the implementation and
effective administration of the Program. Consistent with section 257 of
the NHA, however, the Board may establish standards and policies
through means other than codified regulations. More detailed provisions
implementing these core requirements may be issued by the Board or FHA
through orders, a Federal Register notice, or through FHA mortgagee
letters (or similar administrative issuances). Because this is a
temporary program designed to address the immediate needs of homeowners
faced with the looming threat of foreclosure, the regulations adopted
by the Board are limited to the basic requirements of the Program. The
Board's objective is to adopt regulations that address the core
features of the Program, include necessary safety measures to avoid
fraud, waste, and abuse, and leave FHA with sufficient flexibility to
issue such guidance or processing requirements to make this a Program
that is able effectively to assist distressed homeowners avoid
The regulations in this part present the purpose, the authority
delegated to FHA, and reference to FHA requirements that are applicable
to the Program.\2\ The regulations define the
key Program terms, and address the following Program areas:
underwriting standards, representations of the mortgagee whose
mortgagor will participate in the Program, mortgagor representations,
certain prohibitions imposed on FHA, FHA equity sharing with the
borrower, FHA appreciation sharing with the borrower, the prohibition
on subordinate liens during the first five years of the mortgagor's
Program mortgage, and applicable hearing procedures. The Board has
determined that regulations addressing these areas are necessary for
immediate implementation and long-term administration of the Program.
\2\ Section 4(b) of the Department of Housing and Urban
Development Act, 42 U.S.C. 3533(b), provides that the Federal
Housing Commissioner shall head a Federal Housing Administration
within HUD and shall have such duties and powers as may be
prescribed by the Secretary of HUD. The Secretary of HUD has
delegated to the FHA Commissioner the power and authority to carry
out all FHA mortgage insurance programs, including authority to
issue rules or regulations to carry out these programs.
The payment to FHA of the equity created in the property as a
result of the refinancing of the eligible mortgage is designed to avoid
any windfall to mortgagors that would arise as the result of the
refinancing. The same windfall avoidance concept also applies to the
requirement that property appreciation be shared between the homeowner
and FHA, the latter which is authorized to share any appreciation funds
with subordinate mortgage holders.
Section 257(e)(4)(B) requires that, at a minimum, the Board take
into consideration three factors in determining the amount of
appreciation a subordinate mortgage lien holder may receive. The first
factor is the status or relative priority of the subordinate liens.
This factor is addressed in the payout allocation set forth in the
rule. After sale or disposition of the property, HUD's 50 percent
appreciation interest is paid to prior mortgage lien holders in order
of the seniority in which their mortgage liens were held, to the extent
of HUD's share. Mortgage lien holders that were in 2nd position behind
the 1st mortgage will be paid first, then 3rd mortgage lien holders,
and when the claims of all prior lien holders have been satisfied, HUD
will retain the balance, if any.
The second factor is the outstanding principal and accrued but
unpaid interest of the existing senior mortgage and subordinate
mortgages. Since the total balances may not accurately reflect the
amount the mortgagee potentially could recover in a foreclosure, the
Board determined that these balances should be compared to the
appraised value of the property. Therefore, this factor is expressed in
the matrix described below as a cumulative combined loan-to-value
The third factor is the extent to which the principal and accrued
interest owed on the mortgages that are senior to the particular
subordinate mortgage exceed the property's current appraised value.
This factor is taken into account as well in the matrix for
appreciation sharing because the amount a subordinate mortgage holder
may receive is based in part on the amount of principal and interest,
calculated at the pre-default contract rate, owed on those mortgages
that are more senior than the subordinate mortgage in question.
The Board gave very careful consideration to these three factors by
examining several models developed to implement this authority. The
initial models were very intricate and concern was raised that adopting
any of them would cause confusion in the mortgage marketplace, and
discourage subordinate mortgage holders and servicers from
participating in the program. The Board also considered the potential
for the existing senior mortgage holder, who will receive proceeds from
the refinancing that are likely to exceed the holder's potential
recovery in a foreclosure, to compensate a subordinate mortgage holder
to participate in the Program. The Board encourages lenders to pursue
The following matrix provides the mechanism for determining the
future appreciation payment a subordinate lien holder is eligible to
receive. The Board considers a number of benefits to be present with
this approach. It provides an incentive to action by subordinate lien
holders; reduces administrative costs; is simple to calculate and easy
to understand; and voids competing appraisals.
Appreciation Sharing Payout Matrix
Subordinate lien holder interest that
lien holder is
Cumulative CLTV >135%................................... 9%
Cumulative CLTV <135%..................................>135%................................... 9%
Cumulative CLTV <>
Hugh Wood, Esq.
Wood & Meredith, LLP
3756 LaVista Road
Atlanta (Tucker), GA 30084