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Congress Seeks Stronger FHA Role

Washington-Legislation is in the works to revamp the Hope for Homeowners program and make the Federal Housing Administration refinancing program more attractive to borrowers and servicers.

A bill introduced by House Financial Services Committee chairman Barney Frank, D-Mass., would eliminate the 3% upfront insurance premium, cut the 1.5% annual premium in half and drop shared appreciation where the government could take 50% of the price increase when the house is sold.

For servicers, the bill ensures they will receive a fee for refinancing underwater mortgages and eliminates liability for a first payment default.

Rep. Frank incorporated these changes to the Hope program in a bill that spells out how the new Obama administration should spend the remaining $350 billion of the Troubled Asset Relief Program funds.

He said Congress was too concerned about being "excessively generous" when it drafted the program last summer and passed it as part of the Housing and Economic Recovery Act in July.

"It was drafted so restrictively, it hasn't been used," Rep. Frank said at a committee hearing.

HUD launched the H4H program in October and so far FHA has received 380 H4H applications and only 15 loans have closed.

New research by the Center for Responsible Lending shows that over 1.5 million subprime loans have ended up in foreclosure and another 2 million families with subprime loans are in danger of losing their homes.

Meanwhile, HUD has implemented several changes to the H4H program that Congress passed in October. These changes allow servicers to pay off second-lien holders and extend the term of the loan up to 40 years.

HUD also increased the maximum loan-to-value ratio from 90% to 96.5% of the current appraised value for borrowers with mortgage debt-to-income ratios and total debt-to-income ratios that don't exceed 31% and 43%, respectively.

"Congress is doing everything possible to make this program work," said Brian Chappelle, a mortgage banking consultant with Potomac Partners.

But Mr. Chappelle noted the H4H program still requires investors to take a haircut and write down the loan amount, something investors don't want to do.

The bill introduced by Chairman Frank also requires the Treasury secretary to use at least $50 billion of the TARP funds for foreclosure mitigation.

Rep. Frank expects Treasury will use some of the funds to implement a streamlined loan modification program developed by the Federal Deposit Insurance Corp., which does not require investors to take a haircut.

Under the FDIC approach, the government would provide a partial loan guarantee on a modified loan where the borrower's mortgage payments are reduced to 31% of monthly income.

A 50% loan guarantee would apply to modified loans with loan-to-value ratios up to 100%. For LTVs above 100%, the government loss share would be progressively reduced from 50% to 20% as the LTV rises. Modified loans with LTVs above 150% would not be eligible for a guarantee. These loan guarantees would expire after eight years.

Servicers participating in the FDIC program would receive $1,000 for successfully modifying delinquent loans once the borrower make six payments.

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