The Washington Post has an excellent article recently on the popular foreclosure prevention plan congressman Barney Frank has been floating recently. Here are some relevant parts:
The administration and Federal Reserve Chairman Ben S. Bernanke have urged banks to write down loans voluntarily, but reductions in principal remain rare. So, in late February, Frank suggested a far more aggressive role for the FHA, the government’s mortgage insurance provider.
Under his plan, the FHA would be authorized to insure about $300 billion in new loans, nearly doubling its current portfolio. The new mortgage insurance would be offered on refinanced loans in which lenders have agreed to accept 85 percent of a home’s current appraised value as payment in full. That could mean a substantial loss to the lender but probably a smaller loss than if the devalued house were sold at a foreclosure auction. It also would keep the borrower in the house with more affordable monthly payments and an equity stake in the property.
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