Congress has made up its mind: it is now in the mortgage business, or at least trying to be.  In two proposals, Congress has decided it will help risky home loan holders a helping hand.  The problem with such a program is that the details show the difficulties.  The program is expensive for already hurting lenders, and borrowers do not getaway without anything either.

The plan is for the government to back some of the more risky mortgages that have put so many lenders in trouble.  While it may not sound bad, the problem is how such a program would work, beneficially.  Key questions need answers, for example, who would qualify for such help?  What would borrowers (as well as lenders) have to do to get into the program?

What is In The Works?

The House has passed a bill that would give the Federal Housing Administration the ability to insure mortgages to those people who are at risk of losing their home to foreclosure.  Another bill is in the Senate, and that one gives us a better idea of how the process would work.

In these bills, to qualify, the homeowner would need to be a full time occupant of the property.  They must have a debt to income ratio of more than 35 percent.  Lenders and borrowers have voluntary participation.  Borrowers can contact lenders and lenders can contact borrowers.  The lender gets the final say, though, in if the borrower may participate.

Here are a few more points to keep in mind:

 ·         If a homeowner has a second mortgage, the holder of the second loan must eliminate the debt.

·         FHA backed loan qualifying individuals may be excluded from the program is the lender believes there is too much risk involved.

·         No borrower is turned away just because they are delinquent on the existing mortgage they have or because of their credit score (solely.) 

·         The lenders must be willing to accept no more than 85 percent of the appraised value of the home (which will include loan fees and closing costs factored in.)

      ·         All FHA backed mortgages must be 30 year fixed rates to qualify.

Look at the math.

A home now valued at $200,000, with a borrower that has an upside down mortgage owing $220,000.  The owner’s debt to income ratio has to be over 35 percent, so that means if he makes $4,000 a month, his mortgage debt must be more than $1400.  Once he qualifies like this, the process moves on.

The FHA program would guarantee 90 percent of the appraised value.  This means that the new loan would have to be written down by the lender to $180,000.  The remaining value gives the homeowner equity of 10 percent. 

Also, the lender will need to pay the FHA 3 percent of the loan amount to participate in the program as well as providing another 2 percent for closing costs.  That amounts to an additional, $9000 on this particular loan.

When everything boils down here, the lender loses $29,000.

The borrower also has to pay the FHA 1.5 percent in an annual premium to the FHA.  The amount of this will diminish over time as the principal on the home falls.  An exit fee may also be on the loan, which would be more than 3 percent of the FHA loan amount originally.  From the borrower’s look, there is a high risk of being able to get out of the loan affordable if they sell the property over time.

Perhaps the most troubling aspect of this Congress made loan process is that it is so confusing.  While costly to the lender and to some borrowers, the FHA loan offer here may be an option for some situations.  Nevertheless, it has not become law and President Bush has threatened to veto it.  He and other critics believe that the taxpayer is being asked to pay some $300 billion worth of poorly backed, bad loans through the program.  President Bush has called in irresponsible for both lenders and borrowers.

Read more ... http://www.fhamortgagecenter.com/fha-blog/how-congress-thinks-it-is-helping-the-mortgage-industry/.