The federal government has unleashed the FHA to help at-risk mortgage borrowers keep their homes.

In Rambo: First Blood, Part II, the government sends John Rambo, the one-man task force, to Vietnam to rescue American POWs. Unfortunately, there's no Rambo available to rescue American homeowners, so the feds have to hang their hopes on regulatory changes instead.

Mortgage help on the way

On October 1, 2008, the FHA will begin implementing a government mortgage assistance program, which entices lenders to rework troubled loans in return for the security of FHA mortgage insurance.

To qualify for this insurance, the refinanced debt must be structured as a 30-year, fixed-rate mortgage. Also, the amount of principal outstanding cannot be greater than 90 percent of the property's current appraised value. Where the debt outstanding is in excess of that limitation, the lender would have to write off a portion of the principal.

Eligible homeowners must live in the mortgaged property and demonstrate a financial hardship associated with their current mortgage. More specifically, the payment of the current mortgage must be greater than 31 percent of the borrower's monthly income. To prevent abuse of federal refinancing dollars, the FHA will also require homeowners to certify two things: that they didn't intentionally default, and that they didn't obtain their original mortgage by lying on the loan application.

Lenders are not under any requirement to rework the loans to meet the FHA guidelines. Ultimately, it will come down to which costs less for the lender, foreclosure or mortgage refinance.

Government refinance assistance

Borrowers who proceed with an FHA-assisted refinance aren't receiving a get-out-of-a-bad-mortgage-free card; there are costs and limitations to consider for mortgage help. The main points to note are:

  • The borrower will not be allowed to obtain a home equity loan for at least five years, unless it's necessary to pay for home repairs.
  • The borrower will have to pay ongoing annual mortgage insurance premiums, which are calculated at 1.5 percent.
  • The borrower has to share future equity appreciation with the FHA; this amount becomes payable when the home is sold or the mortgage is refinanced. If the home is sold or refinanced within one year, the FHA gets 100 percent of the profits earned from an increase in the home's value. That percentage is reduced by 10 percent each year until it reaches 50 percent, where it stays indefinitely. In other words, if the borrower waits 10 years before selling the home at a profit of $50,000, the FHA's portion of that appreciation will be $25,000.

The refinance assistance program may not be as aggressive as sending in Rambo, but it's close. Hopefully, lenders, investors, borrowers, and the FHA will use this platform to help troubled mortgage borrowers achieve affordable, sustainable home ownership.

Published on September 26, 2008