By Kenneth R. Harney
Saturday, July 19, 2008

After six months of haggling and political gamesmanship, a massive housing relief bill is heading for final approval.

Although it has hundreds of pages and contains dozens of initiatives, including revamping federal oversight of the mortgage giants Fannie Mae and Freddie Mac, the centerpiece is a $300 billion program, called Hope for Homeowners, designed to provide refinancing lifelines to as many as 400,000 homeowners in deep trouble on their loans.

But what are the specifics? Who would be able to qualify for help? How quickly would Hope be up and running, and how long would it run? Are there any key drawbacks or limitations?

Congress's basic idea is to save people on the edge of the waterfall: families and individuals at immediate risk of losing their homes but who could avoid foreclosure if their mortgage balances and interest rates were significantly reduced.

The program would be entirely voluntary -- and that's a crucial limitation. Lenders and investors who own defaulting mortgages would not be compelled to let their borrowers refinance. If they conclude that they're likely to lose less by allowing delinquent borrowers to go to foreclosure rather than refinance into Hope loans, they would be free to do so, even if their borrowers qualify and want to participate.

Lenders would have to agree to substantially write down principal and penalty fees. The new maximum Hope loan amount -- insured by the Federal Housing Administration under a special fund created by the legislation -- would be 90 percent of the current market value of the property, not the value of the house when the lender originally made the loan.

Plus, the FHA would impose an upfront insurance fee of 3 percent of the new loan amount, payable out of refinancing proceeds that would otherwise go to the original lender. Lenders would also have to clear away any potential issues with holders of second liens on properties -- typically banks that have extended equity credit lines or second mortgages and have a claim on any refinancing proceeds -- before participating in the Hope plan.

There are important hurdles borrowers must get over to qualify, as well. They must:

· Demonstrate a "lack of capacity" to pay their current mortgage but have enough income to make regular monthly payments on a smaller, fixed-rate FHA loan. Their mortgage-debt-to-income ratio must be above 35 percent.

· Certify to the government that they haven't "intentionally defaulted" on their current mortgage or any other debt in order to refinance into a Hope loan. They must also certify that they are telling the truth about all aspects of their financial status and have never been convicted of fraud. Anyone who lies on the application will be subject to severe penalties, including a prison sentence of up to five years.

· Agree to use and occupy the refinanced house as a principal residence and not own any other homes.

An important and somewhat unusual feature of the program is the federal government's requirement that homeowner beneficiaries share any appreciation profits or equity gains from the sale of the house in subsequent years. The message here is that Hope is no free ride. The refinancing process itself would essentially create new equity stakes for borrowers because the maximum loan amount would be 90 percent of the appraised market value of the property.

Borrowers who had been underwater and in serious default would suddenly find themselves with 10 percent equity stakes overnight, but they won't be able to tap that money quickly. If the home is sold within the first year after the refinancing, the FHA must be repaid the equity created in full. In sales during the next four years, homeowners can retain rising percentages of the equity, up to 50 percent. In addition, the FHA will be entitled to 50 percent of any appreciation in market value from the date of refinancing to a subsequent sale.

Under the legislation, the Hope program could start as early as Oct. 1, but it must terminate on Sept. 30, 2011. The unanswerable questions hovering over the entire Hope concept: Will enough lenders and investors agree to take the upfront losses -- they call them "haircuts" -- required to participate? Congressional estimates suggest that up to 400,000 financially distressed borrowers could be assisted, but nobody knows for sure.

Also, will lenders send only the dregs of their portfolios -- borrowers with the least likelihood of future success -- to the FHA? And if so, could the program end up being far more costly than Congress anticipated, even with a $300 billion authorization to cover insurance losses?

Kenneth R. Harney's e-mail address isKenHarney@earthlink.net.