FHA Expands Mortgage Insurance to Troubled Borrowers – What It Means To You

09 Apr FHA Expands Mortgage Insurance to Troubled Borrowers – What It Means To You

The FHA federal mortgage insurance program is being expanded to protect banks from losses on loans that exceed home values in exchange for helping homeowners nearing foreclosure to refinance. The stated goal is, “one hand washes the other,” but what does it really mean for you?

The program requires the homeowner to be up to three months behind on their mortgages, have damaged credit histories and owe more than their homes are worth. Those people will now be eligible to refinance with a federally insured loan.

The plan gives lenders “some hope of a more full recovery,” Credit Suisse analyst Moshe Orenbuch in New York said in an interview today. “If the borrower’s situation improves down the road, you have a legal claim to it.”

The program does not, however, provide for lenders to reduce the amount of the total mortgage to match the value. In other words, if you’re upside-down in your mortgage (owe more than it’s worth) you’re still in the same boat.

About $460 billion of adjustable-rate mortgages are scheduled to reset this year, increasing rates and payments due. Foreclosures are up all over the country, and the banking system is bracing for a multi-trillion dollar loss as people just give up their homes and walk away.

This program sounds great, but it merely keeps consumers under the thumb of mortgage lenders for a longer period of time. You’re in default and the servicer dangles this carrot on a stick in front of you – what if we lowered the rate a bit? Wow – sounds great!

Step back, folks. If you owe $500,000 on a property that’s WORTH only $400,000 then it doesn’t matter how much interest they charge – you’re still paying too much for the house. Remember, a house is only bricks and mortar – it can be replaced, changed, and discarded.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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