About Government Refinance and Home Purchase Programs

Information and Updates on Government Mortgage Programs
Filed under Government Mortgage Financing Programs News, Updates on FHA short refi program - HOPE loan qualifications

Kudos to the folks over at the New York Times for tackling the perplexing issue of how the new housing legislation will really play out when it passes. The idea of helping people who are upside down on their mortgages refinance into FHA backed loans is nice but there are lots of questions to be answered. Here is an excerpt from the recent NYT article:

The effectiveness of the bill will depend to some extent on how it is handled by the F.H.A., an agency created during the Great Depression to insure home loans. It will have several challenges: persuading the lenders who made second mortgages and home equity loans to cooperate; screening loans to make sure borrowers have a good shot at keeping their homes after refinancing; and weeding out those trying to take advantage of the system.

Second mortgages and home equity loans were popular during the housing boom and often allowed Americans to buy a home with little or no money down or let them take out cash against their homes as prices rose. Now, home values have fallen so much that there is little or nothing left to pay off these loans when homes are sold or repossessed. The Congressional Budget Office estimates that about 40 percent of riskier mortgages made in recent years are coupled with such secondary loans.

Under the Congressional plan, these loans would have to be eliminated before homes could be refinanced. People who negotiate loan modifications say holders of second loans have been reluctant to take losses, and lenders with first loans are often unwilling to give them enough money to secure their cooperation. Under the Senate version of the plan, the F.H.A. would have some leeway in negotiating with borrowers who have second loans.

Another challenge for the F.H.A. would be selecting borrowers who have the best chance of paying off new loans. The agency would have to make sure lenders are not unloading only their worst loans, and lenders and the F.H.A. would have to guard against borrowers who can pay their current loans but would like a cheaper, government-backed loan.

How will they guard against people trying to fake it and get a cheaper loan? I have no idea. I worry that no one knows. It seems likely to me that banks will end up playing “chicken” with borrowers they think are bluffing. It also seems like this new legislation will encourage people to play that kind of game. We’ll see.

Comments (0) Posted by G.R.A. Admin on Sunday, June 29th, 2008

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