April 24, 2009
Dear Ms [--]:
You have inquired as to whether lenders organized under or otherwise subject to the Banking Law (“New York Lenders”) may legally refinance home loans in New York under the Hope for Homeowners Program (the “Program”) offered by the U.S. Department of Housing and Urban Development (“HUD”).
Congress created the Program as part of the Housing and Economic Recovery Act of 2008 (“HERA”). HERA amended the National Housing Act to authorize a new temporary FHA mortgage insurance program to help borrowers at risk of default or foreclosure refinance into affordable 30 year FHA-insured mortgages (each, a “H4H Loan”). The Program, which is effective from October 1, 2008 through September 30, 2011, was intended to be of particular benefit to troubled borrowers with interest only, payment option, negative amortization and/or other exotic loan features.
To be eligible to participate in the Program, borrowers must be able to make a number of showings, including: that they have made at least six payments on their existing loans; that they reside in the home; that the borrower’s total monthly mortgage payment debt-to-income (“DTI”) ratio is above a specified level; and that the prior first lien lender and all subordinate lenders have agreed to release their outstanding liens. (In effect, the borrower’s existing lenders will have to absorb a portion of the loss on the borrower’s current financing in order for the borrower to qualify for a H4H Loan to refinance the existing indebtedness.)
As originally proposed, a H4H Loan could be made up to 90% of the then current appraised value of the home in amounts up to set limits – for a one-family home, the limit was $550,440. (There were higher limits for multiple-family homes.)
A condition for participating in the Program is that the borrower must agree to share with HUD a portion of the initial equity in the home that is the subject of the HUD insured loan. This interest will be secured by a Shared Equity Mortgage.
The borrower also has to agree to share with HUD 50 percent of any future property appreciation upon the sale or disposition of the property. Future appreciation is defined as the difference between the gross proceeds from the sale or disposition of the property and the appraised value of the property at origination of the H4H Loan, less allowable closing costs incurred in connection with the sale or disposition and a percentage of the value of any capital improvements to the home that increase the value of the property. This amount will be secured by a Shared Appreciation Mortgage. To facilitate the agreement of subordinate lien holders to participate in the Program and waive any amounts owed to them, HUD originally announced that it might offer subordinate lien holders a share in future appreciation of the property. On October 3, 2008, the President signed into law the Emergency Economic Stabilization Act of 2008 (“EESA”) which made several changes to the Program. Specifically, it permitted HUD to make upfront payments to subordinate mortgage lien holders in exchange for releasing their liens. EESA also amended how a borrower’s pre-program total monthly mortgage payment DTI ratio may be determined. Other changes included increasing the permitted loan to value ratio to 96.5% and the ability to increase the term of the loan beyond 30 years. (A complete explanation of the requirements for participating in the Program is set forth in various releases published by HUD.)
It is the shared appreciation component of the Program that raises questions under New York law. Shared appreciation loans are not authorized under the New York Banking Law. See for example Sections 6-f(1) and Section 103(4) of the Banking Law. While both provisions provide authority for loans other than fixed rate loans by New York Lenders, they do not, however, grant authority for shared appreciation loans. Nor do the various regulations of the Banking Board address this question.
For example, Part 82 of the General Regulations of the Banking Board, implementing Section 6-f, provides in Subsection 82.1(b) that “Nothing in this Part authorizes … a shared appreciation mortgage.”
Likewise, Part 84 of the General Regulations of the Banking Board, implementing Sections 103(4), 235(5-a), 235(6), 380(1) and 380(3) of the Banking Law, does not authorize banks, trust companies, savings banks and savings and loan associations to make such loans.
However, I do not believe this reading of the Banking Law and applicable regulations prohibits New York Lenders from participating in the Program.
I base my conclusion on Section 201 of the Unconsolidated Laws. Section 201 creates a separate grant of authority for corporations subject to the Banking Law to participate in FHA insured loan programs such as the Program. Section 201 provides in relevant part as follows:
“Subject to such regulations, as the superintendent of insurance or the banking board, as the case may be, finds to be necessary and proper, corporations subject to the insurance law and corporations and private bankers subject to the banking law, whether heretofore or hereafter organized are authorized:
To make such loans and advances of credit and purchases of obligations representing loans and advances of credit as the federal housing commissioner has insured or has made a commitment to insure pursuant to the national housing act, and to obtain such insurance and accept the benefits thereof.
- To make such loans secured by mortgages or deeds of trust on real property as the federal housing commissioner has insured or has made a commitment to insure, and to obtain such insurance and accept the benefits
thereof, and to invest in or to make loans upon the security of bonds and notes, or any part of an issue thereof, secured by such mortgages or deeds of trust … .”
Nothing in the Banking Law or Part 82 limits the express grant of authority under Section 201 of the Unconsolidated Laws for corporations subject to the Banking Law to participate in the Program. Nor has the Banking Board adopted any regulations limiting this authority. Accordingly, New York Lenders covered by the express terms of Section 201 may in my opinion participate in the Program.
In issuing this opinion, I am not addressing participation in shared appreciation loan programs generally by New York Lenders outside of the parameters of the Program.
I would add that nothing in this opinion exempts any New York Lender participating in the Program from applicable consumer protections provided by the Banking Law and its regulations.
I trust the above will prove helpful. Should you have any questions, please do not hesitate to contact me.
Very truly yours,
Gene C. Brooks