New Law Allows Desperate Homeowners to Refinance--But Beware

Beth Orenstein
LoanBiz Columnist

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Estimates are some 2 million to 3 million homeowners have gotten in over their heads and are facing foreclosure by 2009. A landmark housing bill signed into law in July will allow some of those distressed homeowners to refinance their loans with Federal Housing Administration (FHA) mortgages and thus avoid foreclosure. The new FHA loans offer troubled homeowners stability because they will be able to refinance to a new 30-year, fixed-rate government-backed mortgage with a reduced balance. Critics say the provision will only help a fraction of those in danger. Still, about 400,000 homeowners are expected to benefit. Also, lenders say, those who meet the program's requirements must make some sacrifices in return.

Homeowners Must Prove They Can Make Lower Refinance Payments

To be eligible, homeowners must have originated their loan or loans on or before Jan. 1, 2008. The loans in question must be against their primary residence. Loans on vacation or investment properties do not qualify for refinancing under this program.  Also, homeowners must be spending nearly one-third (at least 31%) of their total monthly income on their mortgage payments (including taxes and insurance). Example: A homeowner earning $5,000 a month (gross) with housing payments of $1,600 could be eligible where the same homeowner with housing payments of $1,400 would not. Borrowers also will have to prove that they cannot afford to keep paying their existing mortgage but would be able to pay at the lower refinance interest rates.

FHA Mortgage Refinance: Lenders Have to Agree to Deal

    Homeowners can ask to refinance, but the law does not require lenders to say yes.
Lenders will be making a big concession--the loan cannot exceed 90% of the home's current value. A new appraisal will determine its value and with prices declining in most areas, the amount of the new loan is likely to be less than what is owed.

Because a workout could mean substantial losses for the original lenders, no one is certain how many will be willing to do them. "It's really a case-by-case-basis," says Samuel P.  Royer of Homesource Mortgage Services in Bethlehem, Pennsylvania.  "People will have to call whoever is servicing their mortgage to see if the investor will be able to help them out." If the investor agrees to do a workout, the borrower will be put in touch with a new FHA-approved lender to refinance.

FHA Mortgage Refinance Should Be Last Choice

Homeowners should be selective about choosing this home refinance option because it comes with some hefty catches, says Lisa Anderson, of California Real Estate Finance in Alameda, California. "It should be viewed as a last straw," she says. Among the requirements for those who are able to refinance with this program: Any outstanding loans against the home have to be paid off, and no additional home equity loans can be taken out for at least five years.  The biggest catch, though: the borrower has to share any appreciation with the government once he or she sells the home. The homeowner has to share all of the gain if it is sold within five years of the FHA mortgage refinance. The longer the borrower lives in the home, the less gain has to be shared but it could still be up to 50 percent.  "This program is clearly not the best option," Anderson says, "but for those just don't see any other way out, it is an option."

Negotiations with FHA Mortgage Refinance Should Begin Soon

The program does not take effect officially until Oct. 1 and ends Sept. 30, 2011. However, lenders may be willing to start negotiating with borrowers now.  Anderson is optimistic that lenders will participate. "It seems to me that lenders should find it appealing to get something rather than have to take over the home," she says.

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About the Author
Beth W. Orenstein, of Northampton, Pennsylvania, is a freelance real estate writer. A graduate of Tufts University, she majored in English.

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