Under present rules, the Federal Housing Administration cannot insure refinancings of borrowers who are delinquent on their current mortgage payments. The
FHA Secure program is targeted at subprime and other borrowers now facing so-that are in these "toxic" adjustable-rate mortgages -- would waive that requirement, provided the borrowers' credit histories and verifiable income and assets meet FHA's standards. FHA-insured loans, were very popular before the recent subprime boom, offer fixed interest rates, 30-year terms, and do not have any kind of prepayment penalty.
They also come with a rigorous, built-in "loss-mitigation" borrower protection system whereby lenders and loan servicers are required to reach out and identify borrowers facing financial jams and attempt to modify loan terms to help them avoid foreclosure. Subprime borrowers who refinance into the FHA program, in other words, may also receive protections and mandatory
loan modification opportunities they never received under their prior loans.
Bush is also asking Congress to pass tax relief legislation to remove the "debt forgiveness" penalty that id seriously hurting already wounded homeowners that have defaulted on their mortgage. Under current federal tax law, when a lender modifies a delinquent mortgage to forgive a portion of the principal balance owed, or a lender agrees to a "short sale" that includes a partial reduction in the principal balance owed, the borrower faces a demand from the IRS for income taxes on the debt forgiven.
Take this example. Say a financially-distressed borrower negotiates a workout arrangement with the lender that calls for a short sale to avoid foreclosure proceedings. The sale proceeds come in at $30,000 less than what's needed to pay off the full debt owed, and the lender decides to write off that amount. But under current tax rules, the IRS requires the lender to report the amount forgiven, and then pursues the home seller for income taxes -- in this case, on $30,000.
There have also been several bills pending along with the
FHA Secure that the President is pusing to help ease the housing and mortgage crisis. In his plan, Bush called upon Congress to move on the legislation immediately, and said he would support either or both bills.
plans for HUD and other agencies to work more closely with a variety of consumer financial counseling groups to identify and assist homeowners facing unaffordable payment resets or serious delinquency.
plans to require better disclosures to mortgage applicants so they better understand the loans they obtain. Included here were as yet unspecified changes to RESPA and Truth in Lending disclosures, plus mandatory disclosure of yield-spread premium fees by mortgage brokers.
I will continue to research the
FHA Secure Loan and post the facts as they come.