FHA Offers Expensive Hope for the Walking Wounded

Homeowners hoping for an FHA loan modification or refinance will likely get the government assistance they need. But such modification, while certainly helpful at this critical time in the foreclosure crisis, isn't necessarily affordable.

Under the FHA Hope for Homeowners government assistance program, stressed-out consumers can get much-needed relief to keep them from defaulting on their mortgages and going into foreclosure. The initiative is voluntary, but if lenders agree, they can offer borrowers an FHA refinance or loan modification. The FHA is not actually a lender, but offers insurance to give lenders financial support. As part of the recent legislation to offer more government assistance through the FHA, the agency will insure up to $300 billion worth of first mortgages and refinance products, which they believe can save 400,000 homeowners from foreclosure over the next three years.

Rescue comes with a price

If you're among the "walking wounded" and are about to lose your home, this plan could save the day-and your property. But it's not a free giveaway. Those who accept FHA government assistance must agree to some stiff terms that stipulate that they'll have to split any increased equity appreciation that results from the FHA loan modification. The government will get 50 percent of any appreciated value for as long as you own the home, even after you pay off the mortgage. There are also additional charges.  Mortgage insurance will cost you 3 percent of the loan amount, and must be paid up front. In addition, there's a 1.5 percent annual premium, which is about one full point higher than typical FHA loan insurance.

Mortgage fraud protection

The FHA also says that it won't count rental income when considering a borrower's creditworthiness and income level, unless the homeowner has cash in hand from a one-year lease and can prove that he's relocating for work in another region, or puts up at least 25 percent equity. That's because of a type of mortgage fraud, whereby borrowers say they've leased out their home, but are actually planning to leave it behind and move into a home with a cheaper mortgage. At that point, they default on the original mortgage.  Many never actually have a tenant; they just say so as a ruse to get refinancing and a new mortgage on another more affordable home.

The FHA government assistance program additionally bars homeowners from taking out a second mortgage unless the money being borrowed in the refinance is used to maintain the property. Had such a policy been instituted years ago, it might have stopped Americans from spending equity on things not related to their homes, virtually depleting their home's value. By spending cash from their home equity frivolously, millions of Americans were left upside down on their mortgages-which is why they're now turning to government assistance that will be paid for by fellow taxpayers via the FHA.