"THE HOPE FOR HOMEOWNERS ACT OF 2008"
THE HOPE FOR HOMEOWNERS ACT OF 2008 AND THE MORTGAGE DISCLOSURE IMPROVEMENT ACT OF 2008 Keith Goodwin1 I. AMENDMENTS TO THE NATIONAL HOUSING ACT A. Oversight. The HOPE for Homeowners Board of Directors, made up of the HUD Secretary, Treasury Secretary, Chairman of the Board of Governors of the Federal Reserve, and the FDIC Chairman, will oversee the HOPE Program2 and establish its requirements.3 B. Purpose. The HOPE Program will insure distressed owner-occupiers have access to HUD-insured refinancing loans that will feature low interest and reduced principal. Participation in the HOPE Program is voluntary. C. Budget. The money for the HOPE Program comes from a HUD-managed revolving fund, called the Home Ownership Preservation Entity Fund.4 The total original principal obligation of any mortgages insured under the HOPE Program can’t exceed $300 billion.5 Ginnie Mae has the authority to issue guarantees of securities backed by mortgages insured under the HOPE Program, up to that same $300 billion limit.6 D. Eligibility. To be eligible for the HOPE Program, refinanced mortgages must meet the following requirements: 1. Owner-occupied property. The mortgagor provides evidence to satisfy HUD that the residence covered by the mortgage is his primary residence and the only one he has any ownership interest in.7 2. No default or dishonesty. The mortgagor certifies to the HUD Secretary that he a. hasn’t intentionally defaulted on the mortgage or any other debt and b. hasn’t knowingly furnished material information he knows to be false in order to obtain any eligible mortgage.8 3. No record of dishonesty. The mortgagor hasn’t been convicted of fraud in the previous 10 years.9 1 Senior Attorney, Federal Reserve Bank of Richmond 2 12 U.S.C. 1715z-23(s). Not to be confused with the Federal Housing Finance Oversight Board, made up of the FHFA Director, HUD Secretary, Treasury Secretary, SEC Chairman, and FDIC chairman (12 U.S.C. 4513a(c)). 3 12 U.S.C. 1715z-23(c)). 4 12 U.S.C. 1715z-23(l). 5 12 U.S.C. 1715z-23(m). 6 12 U.S.C. 1715z-23(q). 7 12 U.S.C. 1715z-23(e)(11). 8 12 U.S.C. 1715z-23(e)(1). 9 12 U.S.C. 1715z-23(e)(10). 4. Acceptance of potential liability. The mortgagor agrees in writing that he will be liable to repay the FHA any direct financial benefit he derives because he misrepresented anything in his certification or related documents.10 The HUD Secretary has some enforcement discretion in assessing liability. However, false statements on these certifications are also potential crimes, punishable by fine, imprisonment of up to five years, or both.11 5. Qualified DTI. The mortgagor has a debt to income ratio (taking into account all of his existing mortgages at the time) of greater than 31 percent. (The HOPE Board can raise this threshold.)12 6. Income verification. The mortgagee verifies the mortgagor’s income by obtaining transcripts or IRS copies of the previous two years’ income tax returns.13 7. Suitable, reduced principal. The principal amount of the refinanced mortgage a. is determined based on the mortgagor’s ability to afford the mortgage payments14 (or on requirements the HOPE Board establishes later); b. doesn’t exceed 90 percent of the property’s appraised value;15 and c. doesn’t exceed 132 percent of the 2007 limit for Freddie Mac loans ($550,440).16 8. No penalties. All prepayment or refinancing penalties are waived or forgiven.17 9. No second liens before refinancing. For all outstanding subordinate mortgages on the property, those sub-mortgagees accept the proceeds from the new insured loan as full payment and all encumbrances on the mortgage are removed.18 The HUD Secretary, subject to standards set by the HOPE Board, can take “necessary and appropriate” actions to get the sides to agree. a. The HOPE Board will establish standards that will allow the subordinate mortgagee to receive a portion of any future appreciation of the property.19 b. These standards will account for i. the subordinate mortgage’s status20 ii. the total outstanding principal and interest21 iii. how much the senior mortgage principal and interest exceeds the property’s current appraisal value;22 and iv. whatever else the HOPE Board deems appropriate. 10 12 U.S.C. 1715z-23(e)(1)(A)(i)(II). 11 12 U.S.C. 1715z-23(e)(1)(A)(i)(I). 12 12 U.S.C. 1715z-23(e)(1(B). 13 12 U.S.C. 1715z-23(e)(9). 14 Suitability is based on National Housing Act requirements (12 U.S.C. 1709(b)(4)). 15 12 U.S.C. 1715z-23(e)(2) 16 12 U.S.C. 1715z-23(e)(6). 17 12 U.S.C. 1715z-23(e)(3). 18 12 U.S.C. 1715z-23(e)(4)(A). 19 12 U.S.C. 1715z-23(e)(4)(B). 20 12 U.S.C. 1715z-23(e)(4)(B)(ii)(I). 21 12 U.S.C. 1715z-23(e)(4)(B)(ii)(II). 22 12 U.S.C. 1715z-23(e)(4)(B)(ii)(III). v. 10. Limits on second liens after refinancing. Once a mortgage is insured under the HOPE Program, the mortgagor must not grant a second lien on the mortgaged property for at least the mortgage’s first five years, a. unless the HOPE Board grants an exception because the second lien is necessary to ensure maintenance of property standards;23 b. provided the second lien doesn’t reduce the government’s equity in the property;24 and c. provided the second lien, at its inception, doesn’t exceed 95 percent of the property’s appraised value when combined with the mortgagor’s existing debt on the property.25 11. Long-term, fixed rate loan. The refinanced mortgage must carry a 30-year, fixed-rate loan.26 12. Fair appraisal. The appraisal is a. based on the property’s current value;27 b. complies with FIRREA;28 c. performed by industry-qualified appraiser;29 d. complies with National Housing Act standards, including new appraiser standards just enacted;30 and e. independent.31 E. Safeguards. To prevent adverse selection, the HOPE Board will 1. Require mortgagees to provide whatever representations and warranties necessary to enforce compliance with all HOPE Program appraisal and underwriting standards,32 2. prohibit the HUD Secretary from paying insurance benefits to any mortgagee that violates its representations and warranties or never receives a first payment on a refinanced eligible mortgage,33 and 3. set other standards as necessary. 23 12 U.S.C. 1715z-23(e)(7). 24 12 U.S.C. 1715z-23(e)(7)(A). 25 12 U.S.C. 1715z-23(e)(7)(B). 26 12 U.S.C. 1715z-23(e)(5). 27 12 U.S.C. 1715z-23(e)(8)(A). 28 12 U.S.C. 1715z-23(e)(8)(B). 29 12 U.S.C. 1715z-23(e)(8)(C). 30 Appraisers must be certified by the state where the property’s located and by a nationally recognized professional appraisal organization, and they must be able to prove their education in FHA appraisal standards. 12 USC 1708(e)(5). 31 12 U.S.C. 1715z-23(e)(8)(E). No one with an interest in the property or the transaction may attempt to influence the appraisal in an improper way. (12 U.S.C. 1715z-23(g)(1)). Each violation could be subject to a civil monetary penalty of up to $5,000 and annual aggregate penalties could be as high as $1 million. (12 U.S.C. 1735f-14(a)). 32 12 U.S.C. 1715z-23(h)(1). 33 12 U.S.C. 1715z-23(f)(2). F. Insurance premiums. For each refinanced eligible mortgage insured under the HOPE Program, the HUD Secretary will collect 1. A single initial premium payment, equal to three percent of the original mortgage amount (paid from the insured mortgage’s proceeds34) 2. and an annual premium payment, equal to one-and-a-half percent of the remaining insured principal.35 G. Fees and interest. The HOPE Board will set “reasonable” limits on origination fees and ensure interest rates are commensurate with the market.36 H. Shared equity. The HUD Secretary retains an interest in home equity and property value appreciation. The HUD Secretary and the mortgagor share in any equity created as a direct result of any sale, refinancing, or other disposition of the property. 1. For transactions occurring within the first year, the HUD Secretary gets 100 percent of the equity.37 2. After the first year, the HUD Secretary’s stake declines annually by 10 percent until the sixth year, when the stake become fixed at 50 percent.38 I. Program Duration. Unless extended, three years. The HOPE Program took effect October 1 and sunsets September 30, 2011.39 II. AMENDMENTS TO THE TRUTH IN LENDING ACT A. Safe harbor for servicers. A servicer of pooled mortgages has a fiduciary duty to all investors holding a direct or indirect interest in the investment. A servicer satisfies that duty and acts in the best interests of all investors if he implements a loan modification or workout plan for a residential mortgage or class of residential mortgages, provided 1. Default has occurred or is reasonably foreseeable;40 2. The property secured by the mortgage is owner-occupied;41 and 3. The anticipated recovery under a loan modification or workout plan exceeds the anticipated recovery through foreclosure.42 B. General disclosure requirements. These requirements apply to any credit extension secured by a consumer’s dwelling.43 Under them, creditors must mail or deliver mortgage 34 12 U.S.C. 1715z-23(i)(1). 35 12 U.S.C. 1715z-23(i)(2). 36 12 U.S.C. 1715z-23(j). 37 12 U.S.C. 1715z-23(k)(1)(A). 38 12 U.S.C. 1715z-23(k)(1)(F). 39 12 U.S.C. 1715z-23(r). 40 15 U.S.C. 1639a(a)(2)(A). 41 15 U.S.C. 1639a(a)(2)(B). 42 15 U.S.C. 1639a(a)(2)(C). 43 15 U.S.C. 1638(b)(2)(A). loan terms to the consumer at least seven business days before closing.44 In addition to all other written disclosures already required under TILA, the loan terms must also conspicuously state the following: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.”45 The consumer must receive the disclosures before paying any related fee.46 If the disclosed annual percentage rate changes in the interim, the creditor must provide another disclosure no fewer than three business days before closing.47 The consumer can waive these timing requirements, however, if 1. she determines she has a “bona fide personal financial emergency”;48 2. she provides the creditor a dated, written, signed statement describing the emergency and specifically waiving or modifying the disclosure timing requirements;49 and 3. The creditor provides the required disclosures at or before the waiver or modification.50 These requirements take effect July 30, 2009. C. Variable-rate mortgages. Credit extensions based on a variable APR or payments require an additional conspicuous disclosure: “Payment Schedule: Payments Will Vary Based on Interest Rate Change.”51 The payment schedule that follows must provide examples of adjustments to the regular required payment, including the maximum periodic payment, based on the maximum interest rate allowed under that mortgage contract.52 These requirements take effect on a date to be determined by the Board of Governors or January 30, 2011, whichever is later. D. Civil liability. Statutory damages for violations of TILA mortgage disclosure requirements have increased from a minimum of $400 per violation (up from $200) to a maximum of $4,000 (up from $2,000).53 44 15 U.S.C. 1638(b)(2)(A). The creditor must still mail or deliver the disclosure to the consumer no more than three business days after receiving the loan application. 45 15 U.S.C. 1638(b)(2)(B). 46 15 U.S.C. 1638(b)(2)(E). Mailed disclosures are presumed to have arrived three business days after mailing. 47 15 U.S.C. 1638(b)(2)(D). 48 15 U.S.C. 1638(b)(2)(F)(ii). “Bona fide personal financial emergency” is a phrase the Board of Governors may at some point define by regulation. 49 15 U.S.C. 1638(b)(2)(F(ii). 50 15 U.S.C. 1638(b)(2)(F)(iii). 51 15 U.S.C. 1638(b)(2)(C)(i). 52 15 U.S.C. 1638(b)(2)(C)(ii). 53 15 U.S.C. 1640(a)(2)(A)(iii). III. AMENDMENTS TO THE FEDERAL RESERVE ACT AND NATIONAL BANK ACT Community Development Investment Authority. A bank may make community development investments designed primarily to promote the public welfare. Primary benefit for low- and moderate-income communities or families is no longer a prerequisite. 54 54 12 U.S.C. 1338a and 12 U.S.C. 24 (Eleventh).