WBA Overview of New Homebuyer Credit and Recent Government Loan Programs. First-Time Home Buyer Tax Credit

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1 WBA Overview of New Homebuyer Credit and Recent Government Loan Programs First-Time Home Buyer Tax Credit Additional Resources: Applicable laws Amount of tax credit First-time homebuyer Types of qualifying homes Terms of tax credit loan American Recovery and Reinvestment Act of 2009 (tax credit) and Housing and Economic Recovery Act of 2008 (tax credit loan) For homes purchased on or after January 1, 2009 and before December 1, 2009, the tax credit is equal to 10 percent of the home s purchase price up to a maximum of $8,000. The tax credit is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The tax credit is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between those amounts. The tax credit does not need to be re-paid unless it ceases to be the taxpayer s main home within 36 months beginning on the purchase date. The law permitting the tax credit defines first-time homebuyer as a buyer who has not owned a principal residence during the three-year period prior to the purchase. If the buyer is a couple, this test must be met by both individuals. Any home that will be used as a principal residence will qualify for the tax credit. This includes single family detached homes, attached homes like townhouses and condominiums, and manufactured homes. A principal residence also includes one that is constructed by the home owner where the date of first occupancy must be on or after January 1, 2009 and before December 1, This was a new credit-loan last year that applied to home purchases after April 8, 2008 and before July 1, The tax credit-loan amounts to 10 percent of the home s purchase price up to a maximum available credit of $7,500. The creditloan is phased out similar to that described above. Whatever the size of the credit-loan a taxpayer received, the credit-loan must be repaid over a 15-year period beginning on the 2010 tax return. 1

2 Treasury s Making Home Affordable Program First Lien - Home Affordable Modification Program (HAMP) Additional Resources: Effective date Is Treasury s program voluntary or mandatory for financial institutions and servicers? Program elements Trial loan modifications consistent with the Treasury s Guidelines may be offered to homeowners beginning March 4, 2009, and may be considered for acceptance into HAMP upon completion of the trial period and other conditions. This program is voluntary for most financial institutions. Those financial institutions that will be new recipients of TARP CPP money will be required as part of their agreement with Treasury to participate in HAMP. There are incentives for lenders/investors, servicers and borrowers in HAMP. Treasury will partner with financial institutions to reduce homeowners monthly mortgage payments. The lender will have to first reduce payments on mortgages to no greater than 38% Front-End Debt-to-Income ratio. Treasury will match further reductions in monthly payments dollar-for-dollar with the lender/investor, down to a 31% Front-End DTI ratio for the borrower. Servicers must enter into the program agreements with Treasury s financial agent no later than December 31, Eligibility requirements The mortgage to be modified must have been originated on or before January 1, Home must be owner-occupied, single family 1-4 unit property (includes condos, cooperatives and manufactured homes affixed to a foundation and treated as real property under state law). Home must be primary residence. Home may not be investor-owned. Home may not be vacant or condemned. First lien loans must have an unpaid principal balance (prior to capitalization of arrearages) equal to or less than $729,750 if one unit, $934,200 if two units, $1, if three units, and $1,403,400 if four units. New program targeted to second mortgages recently announced on April 28, See information beginning on page 4 related to that program. Borrowers in bankruptcy, active litigation or in foreclosure are not immediately eliminated. 2

3 Program expiration New borrowers will be accepted until December 31, Program payments will be made for up to five years after the date of entry into HAMP. Monitoring will continue through the life of the program. Modification terms Servicers will follow the standard waterfall process to reduce monthly payments to 31% Front-End DTI. Servicers will be required to consider a borrower for refinancing into the Hope for Homeowners program when feasible. Start with reducing the interest rate to reach the target Front-End DTI, subject to a floor of 2%. If this does not achieve the target Front-End DTI, then extend the term of the loan up to 40 years. If term extension is not permitted, then extend amortization. If the target Front-End DTI is still not reached, forbear principal. If there is a principal forbearance amount, a balloon payment of that forbearance amount is due on the maturity date, upon sale of the property, or upon payoff of the interest bearing balance. There is no requirement to use principal reduction (forgiveness) under HAMP; however, servicers may choose to forgive principal. If principal forgiveness is used, subsequent steps in the standard waterfall process may not be skipped. Underwriting analysis Detailed underwriting process required to be followed. Property value must be determined but servicer may use, at its discretion, a GSE automated valuation model (AVM) or a broker price opinion. A standard net present value (NPV) test will be required on each loan that is in imminent default or is at least 60 days delinquent. If the NPV test generates a positive result when applying the standard waterfall, the servicer is required to offer HAMP to the borrower. If the NPV test generates a negative result, modification is optional, unless prohibited by contract. If, in the latter instance, HAMP is not pursued, the lender/investor must seek other foreclosure prevention alternatives. Redefaulting loans A loan will be considered to have redefaulted when the borrower reaches a 90-day delinquency status. Such loans will be terminated from the program and no further payments of any kind will be made to the lender/investor, servicer or borrower. 3

4 Treasury s Making Home Affordable Program Second Lien Program and Support for Hope for Homeowners Additional Resources: Effective date Is Treasury s program voluntary or mandatory for financial institutions and servicers? Program elements Program details announced on April 28, The modification offer for a second lien under the program will occur as soon as the second lien servicer is able to prepare the terms and contact the borrower. This program is voluntary for most financial institutions. Those financial institutions that will be new recipients of TARP CPP money will be required as part of their agreement with Treasury to participate in HAMP. There are incentives for lenders/investors, servicers and borrowers in HAMP. Since the second lien program is one component of Treasury s overall Making Home Affordable Program, many of the program elements and requirements for first liens in HAMP are the same for the second lien program. Treasury will partner with financial institutions to reduce payments on second mortgages. The shared efforts take on different forms depending on whether the second mortgage is an amortizing loan (loans with monthly payments of interest and principal) or interest-only loans. To protect taxpayers, the second lien program will focus on sound modifications. The second lien program is a parallel program to the first lien modification program. Modification of a second lien will not delay modification of a first lien. Eligibility requirements The mortgage to be modified must have been originated on or before January 1, Home must be owner-occupied, single family 1-4 unit property (includes condos, cooperatives and manufactured homes affixed to a foundation and treated as real property under state law). Home must be primary residence. Home may not be investor-owned. Home may not be vacant or condemned. Borrowers in bankruptcy, active litigation or in foreclosure are not immediately eliminated. 4

5 Modification terms Participating servicers will be required to follow these steps to modify amortizing second liens: o Reduce the interest rate to 1 percent. o Extend the term of the modified second mortgage to match the term of the modified first mortgage, by amortizing the unpaid principal balance of the second lien over a term that matches the terms of the modified first mortgage. o Forbear principal in the same proportion as any principal forbearance on the first lien, with the option of extinguishing principal under a formal schedule. o After five years, the interest rate on the second lien will step up to the then current interest rate on the modified first mortgage, subject to the Interest Rate Cap on the first lien, set equal to the Freddie Mac Survey Rate. o The second mortgage will re-amortize over the remaining term at the higher interest rate. For interest-only loans, participating servicers will be required to follow these steps to modify interest-only loans: o Reduce the interest rate to 2 percent. o Forbear principal in the same proportion as any principal forbearance on the first lien, with the option of extinguishing principal under a formal schedule. o After five years, the interest rate on the second lien will step up to the then current interest rate on the modified first mortgage, subject to the Interest Rate Cap on the first lien, set equal to the Freddie Mac Survey Rate. o The second lien will amortize over the longer of the remaining term of the modified first lien or the originally scheduled amortization term, with amortization to begin at the time specified in the original contract. The second lien program will facilitate automatic modification of a second lien when a first lien is modified for participating servicers, to ensure a comprehensive affordability solution for borrowers. Underwriting analysis Detailed underwriting process required to be followed. Property value must be determined but servicer may use, at its discretion, a GSE automated valuation 5

6 model (AVM) or a broker price opinion. A standard net present value (NPV) test will be required on each loan that is in imminent default or is at least 60 days delinquent. If the NPV test generates a positive result when applying the standard waterfall, the servicer is required to offer HAMP to the borrower. If the NPV test generates a negative result, modification is optional, unless prohibited by contract. If, in the latter instance, HAMP is not pursued, the lender/investor must seek other foreclosure prevention alternatives. Redefaulting loans Improved Hope for Homeowners Program A loan will be considered to have redefaulted when the borrower reaches a 90-day delinquency status. Such loans will be terminated from the program and no further payments of any kind will be made to the lender/investor, servicer or borrower. Legislation pending in Congress to strengthen the Hope for Homeowners Program. It would allow FHA to reduce fees paid by borrowers, increase flexibility for lenders to refinance troubled loans, permit borrowers with higher debt loads to qualify, and make further improvements so that the program can function effectively as an integral part of Treasury s overall Making Home Affordable Program. Treasury s Making Home Affordable Program includes Hope for Homeowners as an important element of a comprehensive program. o Servicers will be required to evaluate a borrower for a Home for Homeowners refinance when the borrower is in a trial Home Affordable Modification period. o If a servicer determines a borrower is eligible for Hope for Homeowners refinance in the initial discussion with the borrower, the servicer is required to also offer the refinance at the same time as the trial modification offer. o Servicers and lenders who make mortgages more affordable through Hope for Homeowners will receive pay-for-success incentive payments similar to those offered for HAMP. o Hope for Homeowners offers homeowners mortgage refinancings that include principal writedowns. 6

7 Fannie Mae/Freddie Mac Home Affordable Refinance Program* Additional Resources: Effective date Mortgage loans are eligible for delivery under Fannie Mae s two new refinance options on or after April 1, 2009 for whole loan or MBS (securitized) deliveries. The mortgage insurance flexibilities outlined in Fannie Mae options extend only through June 10, 2010 and will apply only to mortgage loans with note dates on or before June 10, 2010 that are delivered by October 31, Mortgage loans are eligible for delivery under Freddie Mac s Relief Refinance Mortgage program on or after April 1, 2009 and must be originated by June 10, Purpose This initiative is for borrowers who have demonstrated an acceptable payment history on their mortgage but due to a decline in home prices, or where mortgage insurance is not available, have been unable to refinance or obtain a lower payment or move to a more stable product. Eligibility requirements Program is only applicable to borrowers with conforming loans owned or securitized by either Fannie Mae or Freddie Mac. Borrowers cannot be delinquent on mortgage payments. Property must be owner-occupied. Borrower must have sufficient income to support the new mortgage debt. First mortgage must not exceed 105% of the current market value of the property. Mortgage insurance may or may not be required depending on LTV ratios. Loan level price adjustments apply based on the representative credit score, LTV ratio and other features. New Refinance Options for Fannie Mae Loans DU Refi Plus is a refinance of an existing Fannie Mae loan by any lender using Desktop Underwriter for underwriting; the lender does not have to be the current servicer of the mortgage loan. DU Refi Plus will be available for loan casefiles submitted to DU on 7

8 or after the weekend of April 4, Refi Plus is a refinance of an existing Fannie Mae mortgage loan by the current servicer of the loans and is available to all Fannie Mae approved lenders for manual underwriting. Borrower must benefit from refinance either in the form of a reduced monthly mortgage principal and interest payment or a more stable mortgage product (e.g., move from an ARM to a fixed rate mortgage). Occupancy of the property securing the refinanced loan may be a primary residence, second home or investment property. Existing mortgage loans that are ineligible for participation include subprime mortgage loans and Alt-A mortgage loans. New mortgage loan could be fully-amortizing fixed rate mortgage loans with a term up to 40 years, or fully-amortizing ARM loans with an initial fixed rate period of five years or greater with a term up to 40 years. All existing subordinate financing must be resubordinated to maintain the first lien priority of the new refinanced mortgage loan. Freddie Mac Relief Refinance Mortgage Eligible borrowers can improve their position by either reducing their current mortgage interest rate or shortening the amortization term. Similarly it can be used to replace an ARM with a 15-, 20- or 30-year fixed rate mortgage. Cannot be used to payoff or reduce subordinate liens. Existing liens must continue to subordinate to the Relief Refinance Mortgages. *Note that much of the above information is specific to Fannie Mae s two refinance programs as WBA was unable to find much specific information on Freddie Mac s refinance guidelines as of the date of these materials. However, the principles related to the Home Affordable Refinance Program and much of the eligibility requirements are the same for both Fannie Mae and Freddie Mac. Consumers can visit to determine if they have a loan with Fannie Mae or Freddie Mac, and if they would be eligible for the refinance program. 8

9 SBA America s Recovery Capital Loan Program* Additional Resources: Effective date Program overview Beginning June 15, 2009, the U.S. Small Business Administration (SBA) will start guaranteeing America s Recovery Capital (ARC) loans. ARC loans will be offered by some SBA lenders for as long as funding is available or until September 30, 2010, whichever comes first. The SBA ARC Loan Program is another way in which SBA is working to help struggling businesses. ARC Loans consists of deferred-payment loans of up to $35,000 that will be made available to eligible small businesses in need of short-term help to make their principal and interest payments on existing debt. The loans are interest free and 100 percent backed by the SBA. Eligibility requirements ARC loans are available to viable, for-profit small businesses in the U.S. that have qualifying small business loans and are experiencing immediate financial hardship for reasons such as: o Loss/reduction of customer base o Increase in cost of doing business o Loss/reduction of working capital and/or loss/reduction of short term credit facilities o Inability to restructure existing debts due to credit restrictions o Loss/reduction of employees (intellectual capital) o Loss/reduction of major suppliers (major suppliers out of business) Must be an established business, have financial statements demonstrating it was profitable in one of the past three years, and be able to project sufficient cash flow to meet current and future loan payments over a two-year period from loan approval. ARC loans are not designed for start-up businesses. Examples of qualifying loans may include business credit card obligations, capital leases, notes payable to vendors/suppliers, Development Company Loan Program (504) first lien loans, other loans to small businesses made without an SBA guaranty, and loans 9

10 made by or with an SBA guaranty on or after February 17, Program elements ARC loans do not require collateral, are interest-free to the borrower, carry a 100 percent guaranty from the SBA to the lender, and require no fees paid to SBA. ARC loans can be used to make payments of principal and interest, in full or in part, on one or more existing, qualifying small business loans for up to six months. Loan proceeds are provided over a six-month period and repayment of the ARC loan principal is deferred for 12 months after the last disbursement of the proceeds. Repayment can extend up to five years. How to apply ARC loans are made by commercial lenders who are SBA participants so businesses should first contact their commercial lender. To help a lender determine whether a borrower is a candidate for an ARC loan, borrowers should be prepared to answer questions such as: o Has your small business been in operation for a minimum of two years? o Do you have financial statements (balance sheet, income statement, and cash flow statement) which demonstrate your business had a positive cash flow in one of the past three years (or as long as your business has been operating, if less than three years)? o Does your cash flow projection for the next two years indicate sufficient cash flow to meet your current and future loan payments? o Regarding your debts, is your business no more than 60 days past due on any loan (you can be current on all your debt obligations and still qualify for an ARC Loan)? o Is your business suffering an immediate financial hardship? *Note that in addition to the SBA ARC Loan Program, SBA has also expanded eligibility for its 7(a) loan program to spur recovery opportunities for small businesses through September 30, Visit for more information. 10