As $700 billion moves into the economy to stem the housing meltdown, loan modifications and mortgage rewrites should be a big boon for homeowners. HUD-through its FHA component-will, for example, refinance many troublesome mortgages into affordable FHA fixed-rate loans.

Those who may be worried that the $700 billion rescue plan will eclipse efforts already initiated at HUD-including an important FHA effort to accept troubled loans-were given recent reassurance by the FHA that it's still planning to help do mortgage rewrites and critical loan modifications.

Rather than competing with HUD and the FHA, the Treasury may offer those entities its full support and cooperation, because pressure is mounting for Congress to make sure the money is spent in ways that will directly benefit homeowners and taxpayers.

Housing and Economic Recovery Act

During the summer, as the foreclosure crisis accelerated, but before the global financial meltdown occurred, Congress passed the Housing and Economic Recovery Act of 2008. The legislation passed by a wide margin, despite promises by President Bush to veto it. He reversed his position and signed off on the Act, which gives the Treasury broad authority to intervene and help stabilize the housing markets, as it did when it took over Fannie Mae and Freddie Mac. The centerpiece of the plan authorized the FHA to insure up to $300 billion in new loans if banks agree to incur costly mortgage rewrites in order to avoid much larger future losses.

The act represents an updating of the FHA that many housing industry leaders believe is long overdue, and includes nearly $15 billion in housing tax breaks. First-time homebuyers, for instance, can get tax credits of about $7,000. Some of the provisions in the act were delayed, but now they're in full effect. The FHA is ready to roll out a national campaign to help homeowners do loan modifications through affordable refinancing.

Saving homeowners

The FHA will basically take on bad loans from lenders and borrowers and refinance them into new, FHA-insured 30-year fixed-rate mortgages. But to facilitate the program, mortgage holders have to voluntarily agree to do loan modifications and mortgage rewrites that will ensure that the borrow winds up owing no more than 90 percent of the current appraised value of the property. In return for leniency, borrowers will have to share with the FHA potential profits that they might derive by selling their homes. That guarantees that HUD, the FHA, and ultimately, the American taxpayers, all have a stake in those profits if the homeowners don't keep paying back the loans but instead, opt to sell.

As it now stands, the loan modification program allowing the FHA to take over toxic loans and convert them into fixed-rate mortgages will last until 2011. While the HUD/FHA moves are great news for homeowners stuck in bad loans, they have a downside. They represent just another major expense added to the hefty and crippling tab of our taxpayer-financed bailouts.

Published on October 28, 2008