Real Estate & Mortgage Insights

Foreclosure Rescue Bill Explained

The foreclosure and housing "stabilization" bill made its way through Congress and the President, who initially promised to veto it, signed it into law.

All is right with the world.

Well, maybe not.

To qualify for the new Federal Housing Administration (FHA) loan requires you to have a loan-to-value of 90% or less, including the UFMIP (up-front mortgage insurance premium). That is 90% of the current appraised value (as determined by a certified FHA appraiser), not what you paid for the house.

Since the problem has more to do with home prices falling rather than "I can't afford the payment," this is a moot point for many homeowners.

Of course, you can talk to your current loan servicer and get them to forgive part of your debt. Debt forgiveness is (of course) income. Income is taxable by the Internal Revenue Service (and your state income tax collection service).

From the loan servicer all you have to do is get permission from the servicer, the investor (if there is one), whoever invested in the pools of mortgage-backed securities (if there are any), and the private mortgage insurance company (if there is one). Most people call this the "lender."

This process can take months. Some loan servicers can move faster because they have the experience.

For sales.

Not refinances. No lender wants to give away something free to someone that may benefit. They would rather foreclose and pay all the maintenance fees along with the costs associated with foreclosure.

Or deal with a sale.

The new FHA loan is not free, either. It's designed to protect folks from foreclosure, not protect them, period. As a result, borrowers share the growth in equity. If the house sells or is refinanced in the first year, the FHA gets all of the equity (appreciation). After one year, they get 90% of the equity.

This drops ten percent a year through five years until the FHA gets half the appreciation.

They never get less than half.

The maximum FHA loan varies by area, so you should check with your local Realtor for the maximum in your area. Also, FHA loans make the most sense for condominiums rather than Single Family Homes, co-ops, or two- to four-unit housing because you only pay the monthly mortgage insurance, not the UFMIP.

There are criticisms of the bill, but it will mostly help those few who are overwhelmed by their payment, not their value.

The bill also more tightly regulates Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). There are provisions for them to borrow money should they need it to stay afloat (sort of like the Chrysler loan many years ago).