HomeLoans Blog

Several news articles have pointed out that federal efforts to provide relief to the national foreclosure problem have not produced much in the way of tangible results.

The Mortgage Daily News reports on May 3, 2008 that "A key committee in the House of Representatives late Thursday passed legislation that would make up to $300 billion in federally insured mortgages available to borrowers facing foreclosure."

This is being called the FHA short pay loan, taking the name of the real estate sales approach that negotiates with the existing lender to accept a lower payoff, so the troubled home owner can sale their property. It is becoming a specialty niche for some real estate agents.

This proposed loan program, insured by FHA, would allow the home owner to retain their home, but to negotiate a lower payoff so that the money owed could be refinanced into more affordable terms.

One indication is that this is targeted towards borrowers in a negative amortization loan, who are not able to sell because their interest has accumulated, increasing the balance. It might also be able to help borrowers who are in an subprime loan, especially those who are in an adjustable rate subprime loan.

Again the Mortgage Daily News writes, "The administration's current efforts to help homeowners facing foreclosure is called FHA Secure and, according to The New York Times, has thus far assisted only about 2,000 homeowners who were "clearly behind in repaying their loans." We will look at this program and its progress next week."

My own experience with FHA Secure has not been good. Most troubled homeowners do not meet the very restricted terms of the program. Many lenders are not accepting loan submissions under the program. It does not surprise me that only 2000 people have been helped nationwide with this program.

A Wall Street Journal article dated April 8, 2008 reported that "The problem, however, is that the refinance programs are turning out to be far less effective than officials had hoped."

The key to this new program working will be the willingness of loan servicers to accept a loss. This determination will likely be made on each individual case.

It is vital that trend of foreclosures be stopped. If not, property values everywhere will be declining, and lenders will cease lending at higher loan to values. Meaning that anyone who wants to buy a home will be required to make a larger down payment. This of course will reduce the pool of qualified buyers, and further depress market values.

Home owners who would like to refinance, say for home improvement, would also be impacted, as their reduced property value might not support sufficient equity to take out a new loan.

I will watch this bill. My recommendation is that some version of this bill be supported across party lines.