Will Mortgage Brokers Be the Hope For Homeowners?

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

The FHA Hope For Homeowners program was designed for existing homeowners, struggling with mortgage payments and an “upside-down” equity position in their primary residence.  It is a new program with lots of misinformation.  Some believe it can only be offered by existing loan servicers, some think only participating lender/servicers can offer the program, and few are certain if the program will be offered through mortgage brokers.

I discussed the key components of the FHA Hope For Homeowners loan program on Mortgages Unzipped.  They are are not limited to but include:

• An appraisal will be performed and the maximum loan amount will be 90% of that appraised value.  All subordinate liens will be extinguished and the exiting lienholder will have to agree to a loss of principal.
• The current housing payment must be more than 31% of the homeowner’s gross monthly income.
• The homeowner must not have misrepresented his/her income on the original loan application.
• The homeowner must get a new 30-year fixed rate loan and qualify based upon documented income.
• The homeowner must agree to an declining equity sharing agreement (for the existing equity), with the FHA, for a specified period of time.
• The homeowner will share in future appreciation with the FHA.
• The program is completely voluntary; existing lienholders don’t have to participate.

This article isn’t about whether the Hope for Homeowners program is a “good” idea.  I believe that the future of mortgage refinancing lies in the immediate reality that lenders will accept short payoffs for refinance loans in addition to resale transactions.  Robert Kerr made a comment, about a year ago, about the morality of loan modifications and suggested that lenders should “mark-to-the market”and accept lower balances to be commensurate with declined valuations.  That comment inspired my semi-satirical recommendation of short payoffs, cross-collateralized against the net present value of government retirement entitlements. Robert made me think that the moral is the practical.

Will the investors play ball? One lender, acquired at the tail of the sub-prime boom, sold its entire loan portfolio for about 22 cents on the dollar this past summer.  This means that a $300,000, 100% financing home loan, made in 2005, was bought for $75,000.  With a cost basis that low, reason would dictate that a short refinance payoff of $200,000, when faced with the risk of “testing the market” at the courthouse steps, could be a VERY profitable option.  If you crunch the numbers, that investor stands to almost triple their money in 4-6 short months; a spectacular return on investment.

Hope for Homeowners, or another short refinance payoff loan solution, could stabilize the real estate market.  The evident problem is that the shrunken mortgage industry isn’t able to handle the potential volume; this is where the former mortgage brokers could really be useful.  Many former mortgage originators, working for former mortgage brokerages, have found greener pastures in the loan modification business.  Their former skill sets, combined with their newly acquired ones, could be the future of the success of a program like this.

Mortgage brokers have traditionally been the more nimble marketers in the residential lending business.  Their entrepreneurial nature and higher origination margins provide incentive for them to “re-enlist”.  Engaging mortgage brokers in this program is  the equivalent of the successful “surge” strategy, recently deployed in the Middle-East.

Will the potential abuses of a largely unregulated army dissuade lenders and agencies to allow these “mercenary troops” into the fight? I don’t think so.  FHA brokers (called loan correspondents) are required to maintain a minimum net worth, post a bond, and compensate all of their originators as employees rather than independent contractors.  HUD-approved brokerages understand that the penalties for fraud result in their “eagle” being pulled.  That penalty serves as a healthy deterrent from the shenaningans of the earlier part of the decade.  Moreover, the strict HUD loan guidelines, increased disclosure from funding lenders, and general mistrust of originators from borrowers should better define the “rules of engagement” to these mercenary troops.

If the moral is the practical, negotiated payoffs for new refinance transactions should be beginning of the market stabilization.  We just don’t have the personnel to handle the campaign.

RESOURCES FOR MORTGAGE ORIGINATORS:

Marketing- Scott Tucker

Origination Sales Training- The Mortgage Cicerone

Lead Acquisition and Management- Bill Rice