FHA Mortgage Relief Plan Moves a Step Further

May 24, 2008 - Legislator’s hopes of providing over 500,000 distressed homeowners with cheaper Federal Housing Administration (FHA) mortgages just moved a little closer to becoming law as it is possible the President could be in a position to sign off on the bill by early July.   Under a deal hammered out by the Senate Banking Committee, funding designated for low income housing would be shifted and applied for a three year period to cover the cost of the proposed FHA program.  The new FHA legislation would permit borrowers who have risky adjustable rate mortgages to refinance (refinance mortgage rates) into more affordable FHA loans backed by the U.S. government.  GSE titans Fannie Mae and Freddie Mac would also get into the act by committing a portion of their profits, to the tune of $500 million to be applied to a new fund targeted to provide low income rental units.  However increased oversight and control of the GSEs is likely to be part of the deal as the Feds may require additional authority to monitor the GSE giants in an effort to curtail recent accounting woes experienced by both Fannie Mae and Freddie Mac.   

Over 200,000 borrowers have benefited from FHA refinancing since September of last year as many of these borrowers might have been unable to refinance through then available channels.  Borrowers are required to demonstrate that they can afford to re-pay the newly refinanced FHA loan.  Both the borrower and the lender would be required to pay a risk-adjusted premium to receive FHA financing and then if and when a borrower opts to either sell or refinance the subject property, they would be obligated to share half the proceeds with the government.  As a result of FHAs involvement, should the borrower default on the loan, the government (or more specifically the taxpayers) would be required to cover the loss to the lender.   Under the proposed guidelines, FHA qualifying standards would be relaxed for those borrowers with non-prime credit if the lender consents to forgiving a portion of the mortgage balance. 

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Now that the bill has been approved by the Senate Banking Committee, this paves the way for the Senate to vote on and potentially approve the bill shortly after the Memorial Day holiday.  From there the bill will face reconciliation with the House of Representative’s version, where differences may hinge on how best to cover the cost of the bill and from there it is on to the White House and the President’s desk hopefully by July.

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