FHA Provides Relief to Owners Facing Foreclosure
To address the nation’s foreclosure crisis, the housing stimulus package approved by Congress will allow the Federal Housing Administration (FHA) to guarantee up to $300 billion in new mortgages if lenders voluntarily agree to reduce the outstanding principal and adjust the terms to make them more affordable for borrowers.
“Expansion of the FHA program to provide new loan guarantees will help finance at-risk borrowers into viable mortgages and prevent further foreclosures,” said NAHB President Sandy Dunn.
The Congressional Budget Office (CBO) estimates that the FHA foreclosure relief plan could help as many as 400,000 struggling home owners to stay in their homes.
According to the CBO, this three-year program, which becomes effective on Oct. 1, will not cost taxpayers a dime; it will be more than paid for by using funds in the first few years from a new affordable housing trust fund to be established by Fannie Mae and Freddie Mac.
Known as the FHA Housing Stabilization and Homeownership Retention Act, the program is designed to help borrowers in danger of losing their home to refinance into lower-cost government-insured mortgages they can repay.
The program contains key protections to limit its budgetary impact, including higher refinancing fees that will be used to establish a new FHA reserve to cover possible losses from defaults on these government-backed mortgages.
In order to participate in the voluntary program, lenders and mortgage investors must take significant losses by reducing the loan principal on an existing mortgage. In exchange for an FHA guarantee on the home loan, borrowers must share any profit from the resale of a refinanced home with the government.
Only primary residences are eligible; no speculators, investment properties or second homes will be refinanced.
Specifically, the FHA would pay the existing lender no more than 85% of the property’s present appraised value. The FHA would then charge the home owner a loan at 90% of the appraised value. The extra 5% is a cushion against losses and would pay for the up-front premium.
In the example of a $250,000 home with a 100% mortgage that has declined 10% in value to $225,000, the FHA loan would repay the lender 85% of the home’s current worth, about $191,250. The existing home owner’s new loan would be for 90% of the $225,000, or $202,500.
The plan also provides $180 million for financial counseling and legal assistance to help families stay in their homes.