Underwater California homeowners to get more help

Kathleen Pender

Thursday, May 10, 2012

In a big change, the state-run Keep Your Home California program will use federal money to reduce an eligible homeowner's mortgage balance by up to $100,000 without requiring a matching reduction by the bank servicing the loan.

Many more underwater California homeowners will get principal reductions when the change takes effect in early June, but there's a catch: The reduction is structured as a forgivable loan. If they sell their house within five years, any profit will go toward repaying the principal reduction. After five years, there is no repayment requirement. Under current rules, the loan is forgiven after three years.

Loans backed by Fannie Mae and Freddie Mac are potentially eligible for principal reduction under this program.The money is coming from a $2 billion grant the state was awarded in 2010 from the U.S. Treasury Department's Hardest Hit Fund. The grant provides four types of assistance to low- and moderate-income homeowners who can document a financial hardship.

The program allocated $772 million of that money to reduce principal by up to $50,000 per homeowner, but it required a dollar-for-dollar reduction by the servicer. Few servicers participated in this part of the program, and it only applied to loans held in their own portfolios.
As a result, only 926 homeowners qualified for principal reductions totaling $44 million.

Servicers' role

The California Housing Finance Agency, which runs the program, says that starting in early June, it will no longer require servicers to provide a matching reduction, although they will have to modify the loan by reducing the interest rate, extending the term or both. Homeowners can still get up to $100,000 in principal reduction, but it will all come from the federal money.

The goal is to get the borrower's debt-to-income ratio to 31 percent and loan-to-value ratio under 120 percent, although "they can go as low as 105 percent LTV," says Diane Richardson, the program's director.
The agency expects to reduce principal for about 9,000 homeowners under the guidelines that take effect in June.

To qualify under the new rules, homeowners must use the home as their primary residence, owe more than it's worth, fall below the income limit for their county, demonstrate a financial hardship and owe no more than $729,750 on a first mortgage originated on or before Jan. 1, 2010. (The previous cutoff date was Jan. 1, 2009.)

In San Francisco the household income limit is $121,900. For other counties see keepyourhomecalifornia.org/files/income.pdf.

The owner's servicer must be part of the program, but more servicers probably will participate if they don't have to cut principal out of their own pockets.

The program originally prevented people who had taken cash out of their homes - through a cash-out refinance or home equity loan - from getting a principal reduction but it lifted that restriction last fall.

The Treasury Department has approved the latest rule changes.
The Obama administration has been pressuring Fannie Mae and Freddie Mac to permanently reduce principal on underwater loans. The Federal Housing Finance Agency, which regulates Fannie and Freddie, has not allowed them to forgive principal but has allowed temporary reductions known as principal forbearance as part of a loan modification.

A spokeswoman for the federal agency says Fannie and Freddie may accept the pay down of mortgage principal funded through a Hardest Hit Fund program - including Keep Your Home California - as long as other servicing guidelines are met.

Stance unchanged

That doesn't mean the federal agency has changed its stance and will allow principal forgiveness on Fannie and Freddie loans outside of such programs.

The California agency announced several other changes to its four Keep Your Home California programs:
-- Starting in early June, homeowners can receive up to $100,000 in total assistance from one or more of the programs. The current household limit is $50,000.
-- As of May 7, homeowners with a financial hardship can receive up to $25,000 to catch up on missed mortgage payments. The current limit is $20,000.
-- Starting in early June, principal reduction will be disbursed in the first year rather than spread over three years.

On all programs combined, the state has spent $411 million of the $2 billion it received from the Hardest Hit Fund. It has until the end of 2017 to spend the remaining funds.

To apply for the program, call (888) 954-5337. Applications for principal reduction under the new rules will not be taken until early June.

Kathleen Pender is a San Francisco Chronicle columnist. Net Worth runs Tuesdays, Thursdays and Sundays. Blogging at sfgate.com/pender. Twitter: @kathpender. kpender@sfchronicle.com

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This article appeared on page D - 1 of the San Francisco Chronicle