The HOPE for Homeowners (H4H) program provides refinancing for qualifying homeowners into new, government-guaranteed FHA mortgages with fixed rates and terms of 30-40 years, but has been little used due to onerous restrictions. The Helping Families Save Their Homes Act of 2009, which was signed May 20 and became effective that day, modified H4H in the hope of making it more workable for homeowners and lenders alike.

A lender who chooses to participate must write down the mortgage to a maximum of 96.5% of the home’s current (not original) value. In exchange, the homeowner must agree to share up to 50% of the new equity and any future appreciation with HUD, which can give the lender all or part of its share of the profits. But profits are capped at the home’s original appraised value, so the “profit-sharing” provision really only reduces the lender’s losses rather than giving it any profit opportunity.

Suppose, for example, a home was originally appraised for $500,000 with a first mortgage of $450,000; it’s now worth 20% less, or $400,000. Under H4H, the lender could write the debt down to $386,000 (96.5% of $400,000), the homeowner could refinance into a $386,000 FHA mortgage and pay the original lender, HUD could receive 50% of future profits and transfer those to the lender as compensation for its $64,000 loss (the original $450,000 less the $386,000 that was refinanced). Suppose that the home appreciates back to $500,000 and is sold immediately, for a profit of $100,000, of which the homeowner’s share is $50,000. The lender also receives $50,000 – but since its original loss was $64,000, it still has a loss of $14,000, even though the homeowner has an after-tax profit of $50,000. The profit-sharing cap means that the lender can never be made whole in this example, which assumed the best possible terms for the lender given an original loan of 90% of appraised value. (The lender could only have made a profit in the unlikely event the original loan had been less than 87.2% of appraised value.) And the lender has to wait for its share of the profits until the homeowner chooses to sell.

But the real reason for a lender to participate is that foreclosure would result in an even greater loss. In this market, though, that’s almost certainly the case (losses after foreclosure can easily exceed 40% of the mortgage balance). Rational lenders should prefer the lesser evil of H4H to the greater evil of foreclosure. For this reason, industry groups such as the American Securitization Forum and the Mortgage Investors Coalition have welcomed the H4H modifications.

Holders of second mortgages can also participate in the program but have been reluctant to do so, since their recovery would be limited to a small share of the lender’s share of HUD’s share of the profit-sharing. If they simply refuse to consent to the refinancing, they receive the full benefit of any future appreciation that exceeds the first mortgage – which could result in a full recovery on the loan and, if the home appreciated at all, would be likely to be more than they’d receive under the profit-sharing cap. And second-mortgage lenders can receive incentives under another government program, Making Home Affordable, further reducing their willingness to participate in H4H. But it’s likely that HUD will apply the same guidelines to H4H in order to encourage their participation, since without second-mortgage lenders H4H could only have limited success.

Homeowners must satisfy a number of conditions to qualify for H4H. Also, FHA mortgages are capped at $729,750 for a one-family home in the New York area. If you qualify, the new H4H provisions may give you another alternative to a short sale or foreclosure.

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