The legislation that has just gone thru congress and passed will go into affect October 1st 2008.  This new legislation will allow cash strapped borrowers that are upside down on their mortgage the opportunity to qualify for a safe, government-insured mortgage refinance of their home thru FHA to get more affordable loans with lower monthly payments

It would also help homeowners who have seen their mortgage rates skyrocket and their home values crash to the bottom.  FHA will allow the home owner the opportunity to refinance their mortgage at lower balance and lower interest rate as long as the homeowner can qualify at the new payment.  This type of loan will require documentation of income as well as assets to qualify.  

This program also brings substantial benefits to the lender as well.  It would stop the number of foreclosures thru out the valley.  After taking some loss on their existing loans to homeowners, the lenders would be assured of a government payoff if their new replacement loans turn sour.  The bank would have an incentive to put mortgages into the program in cases in which the losses they face are smaller than what it would cost to foreclose.  This will also stabilize home values in the valley.  With the number of foreclosures and short sales the value of most homes since 2004 have gone down almost 50%.  By allowing homeowners in trouble to keep their homes this will decrease the number of short sales and foreclosure inventories.

How the program would work:

In the first example, the homeowner could afford a new mortgage and the bank would have a clear incentive to allow an FHA backed refinance.  In the second example, the borrower is so financially strapped that the mortgage holder would have little interest in agreeing to a refinance; the bank could do better by foreclosing.  The examples do not include insurance premiums and property taxes that may be added to the monthly mortgage payment.

Example #1

Home bought in 2005 for $200,000  -  now worth $150,000.  Loan balance is $200,000.FHA PLAN:Borrower:  Shows he/she can afford a loan of 90 percent of the home’s value:  $135,000.Lender:  Agrees to lower the principal of the loan by 15% of the reassessed value $127,500.  (36% loss)Borrower:  Monthly payment of $1,470 at 8% balloon rate falls to $875 at 6.75% fixed rate.FORECLOSURE:Borrower:  Loses home.Lender:  Seizes home and pays foreclosure expenses, leaving $110,000.  (45% loss)

Example #2

Home bought in 2006 for $150,000 – now worth $120,000.  Loan is $150,000.FHA PLAN:Borrower:  Shows he/she can afford a loan for 75% of the home’s value - $90,000.Lender:  Agrees to lower the principal of the loan by 30% of the reassessed value:  $84,000.  (44% loss)Borrower:  Monthly payments of $1,200 at 9.0% adjusted reset would fall to $600. At 7% fixed rate.FORECLOSURE:Borrower:  Loses home.Lender:  Seizes home and pays foreclosure expenses, leaving $87,600 at (41% loss).Souce:  House Financial Serivces Committee, Bankrate.com

For more information on the new mortgage rescue legislation visit www.fha.gov., or call Roy Fernandez at 623-388-7706 and I can provided you with more detailed information.