Guest Post: Facing Foreclosure? Housing Bill Provides FHA Help

Well – the Senate has passed what is now referred to in the media as the sweeping housing legislation in a generation. The highlights are in the post here. The highlights of the reform remain the same. What does this all mean to you?

One part of the 700 page measure is this: If you are in foreclosure or fearful of foreclosure because of resetting mortgage rates, the bill provides an option for refinancing. It allows the Federal Housing Administration (FHA) to offer government backed, insured 30 year fixed mortgages to current homeowners at risk of foreclosure.

There is one big “If” for the successful implementation of this program: your current lender must agree to lessen the principal balance of the loan to a level that is 90% of the current value of your home.

Would a lender do this?

Maybe. It will be case by case – certainly. In hundreds of thousands of cases today, the lender is faced with delinquent or no payments from homeowners. The prices of homes have declined in most areas of the country. Homeowners and lenders have borrowed and lent more than the current housing market will bear.

The lender faced with delinquent loans faces these choices today:

1. Allow the homeowner to complete a short sale (in which the principal paid back to the lender is less than what is currently owed)

2. Initiate foreclosure proceedings due to non-payment of the mortgage

3. Enter into an agreement with the current homeowner according to this new legislation in which the lender agrees to be paid back less than they owed (90% of the current value of the home).

Short sales and foreclosures are already reaching record numbers. How about #3? Why would this make sense to a lender?

It costs a lender a lot of money to foreclose or allow a short sale. Some lenders have had to create departments at a very high cost to evaluate and execute their borrowers’ requests for short sales, and to execute the foreclosure process. There are costs for lenders to essentially buy these houses back, hold them in inventory (while not receiving monthly payments) and then resell them. There is not only the cost of the inventory but the high cost to sell the homes again.

It may make ultimate sense to reduce the principal to a lower level. The new loan would be backed by the FHA insurance which protects the lender from non-payment of the loan, the costs to carry non-performing inventory would be reduced, the staff buildup to handle short sales, and foreclosures could lessen. All in all, it may be a good thing for all involved.

And – the benefit to society? The intent of this measure is to allow homeowners to remain homeowners.

Cindy Fox, CMP, CMPS, CLA

Mortgage Planner

SunTrust Mortgage

Direct: 703.464.4345

cynthia.fox@suntrust.com