About Government Refinance and Home Purchase Programs

Information and Updates on Government Mortgage Programs

There are a lot of things nobody yet knows about the housing legislation going through the Senate. It looks likely now that the legislation will make its way to the President in July and the President admits that he is probably not really going to veto it. But when the new rules are in place what will really happen on the ground level?

For those unfamiliar with the housing bills being worked on in congress, a major portion of the bill is beefing up the FHA budget by $300 Billion dollars so that home loans that otherwise might default can now be refinanced into FHA loans. The goal is to keep people in their homes and thus help stabilize the housing market and the US economy as a whole.

How Short Refis will likely work

The new program might be best described as a “short refi” program. It will work very much like a short sale on a home. What is a short sale you ask? A short sale often occurs when a home is on the verge of being foreclosed so as a compromise the borrower finds a new buyer for the house at a discounted rate. So for instance, if the mortgage is $200,000 and the borrower can’t keep up, that borrower could bring a potential buyer to the bank at a price of, say, $150,000. The bank then has to decide if it is willing to accept $150,000 as payment in full on the $200,000 debt. The reason the bank might agree to this is because if it has to foreclose on the property and sell the home at auction it might clear significantly less than the $150,000 offer on the table. It is likely a painful compromise for bank, but it is a compromise that often makes sense. The bank loses less and the struggling borrower avoids a foreclosure on his/her credit history.

The new housing bill would essentially allow struggling borrowers to short sell the property to themselves. In essence, the borrower that is on the verge of foreclosure could now approach the bank and say “I can’t keep up with this existing mortgage at $200,000 but I can qualify for and afford the FHA mortgage at $150,000. Will you be willing to write off that $50K to let me in to this better mortgage?” The bank then has to say yes or no. Why would the bankers say yes? If they really believe the borrower will default otherwise. Why would they say no? If they think the borrower is bluffing.

So it seems to me that we are in for a lot of gamesmanship and bluffing in the next little while. The borrowers who want these new reduced FHA loans may have to play chicken with the lenders. The fact is that banks don’t want to write off billions of dollars. But they do want to mitigate their losses so we will see how hard it is to convince them that they should approve these “short refis”.

Let the games begin…

For more details on the new rules see here

Comments (4) Posted on 31 Jul