Relief for Homeowners Facing Foreclosure

The President this week signed into law a $300 billion housing rescue bill aimed at helping troubled homeowners avoid foreclosure and sets the stage for bail-out funding of mortgage giants Fannie Mae and Freddie Mac, if needed. The law takes effect on October 1st and allows thousands of at-risk borrowers to refinance their unaffordable original mortgages into new low-cost fixed-rate loans insured by the Federal Housing Administration (FHA). Here is an overview of who is eligible and how the process will work:
Eligibility. To be eligible borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. They must also spend more than 31% of their gross monthly income on mortgage debt. The homeowner can be current on their mortgage payments, but will have to prove that they will not be able to continue paying their mortgage in the future.
Before homeowners will be approved for FHA-backed mortgages, they must first retire any other debt on the home, including home equity loans and lines of credits. In addition, borrowers will not be permitted to take out an additional home equity loan for at least five years.
Lender Approval. If a lender chooses to participate, it must write down the existing loan to 85% of current market value. That loan would be replaced with a new 30-year fixed rate FHA-backed for 90% of current market value.
An index of 20 cities across America indicates that home values have declined an average of 16%, meaning some areas have seen price declines significantly greater than 16%. In areas where prices have drastically decreased this will mean substantial losses for the lender…some estimates as high as 40%. Lenders are unlikely to participate unless they believe that they will lose even more money through a costly foreclosure process. The original lender will have to pay FHA an up-front premium equal to 3% of the mortgage principal; write-off any prepayment penalties; and accept the proceeds from the new FHA loan on a paid-in-full basis.
Additional cost. The refinanced loans do come with several strings attached. First borrowers are responsible for paying an insurance premium of 1.5% of the principal annually to the FHA for guaranteeing the loan. Also, borrowers agree to a “3% exit fee” of the mortgage principal to the FHA when they resell or refinance the home. Plus, they have to agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. This ‘sharing’ drops 10% per year until it reaches and remains at 50%.
While many members of Congress are patting themselves on the back for saving the homeowner, I suspect the qualification process will prove to be excruciatingly painful, frustrating and slow. “If you are one of the 400 thousand homeowner’s facing foreclosure, your best bet is to start the process as early as possible,” says Chad McWhirter of MortgageBanc, LLC in Birmingham.   For additional information, contact your current mortgage company or go directly to an FHA-approved lender. These lenders can be found on the Department of Housing and Urban Development website at
Next week, I’ll continue part three of my series on Business Succession Planning.