Loan Modification

FHA guidelines: Government agencies, mortgage industry reportedly reaching settlement

By Karen Lawson

In potentially good news for homeowners struggling with mortgage loans of more than their homes are worth, the Federal Housing Administration, popularly known as the FHA, and other government agencies are close to settling with banks and mortgage lenders over improper foreclosure procedures. The Washington Post cites an unnamed official in reporting that a nationwide investigation led by Iowa’s attorney general, is close to reaching a settlement allegedly requiring errant lenders to provide remedies to homeowners who were denied foreclosure prevention options including loan modifications. Under FHA guidelines, lenders are required to comply with FHA programs for preventing foreclosure of FHA insured home loans.

FHA loan programs protect mortgage lenders and homeowners

Although FHA does not directly provide mortgage loans, it insures loans made through its network of approved lenders. Mortgage lenders agree to abide by FHA guidelines for underwriting, approving, and servicing loans originated under its programs. Homeowners with FHA loans are protected by FHA regulations requiring lenders to work with borrowers toward saving their homes and preventing foreclosure. FHA is liable to mortgage lenders for losses caused by mortgage defaults and foreclosures, which explains its motivation for reducing such costs when feasible.

FHA foreclosure prevention options include temporary forbearance, repayment plans, mortgage loan modification, approving short sales, and accepting deeds in lieu of foreclosure. FHA also cooperates with government initiatives including the Making Home Affordable modification and refinance programs.

Settlement impeded by complex housing finance industry

The pending settlement between government agencies and mortgage lenders is being delayed by the complexities of the housing finance industry. This includes how mortgage loans are sold on the secondary mortgage market; Freddie Mac, Fannie Mae, and investors are interested parties in the settlement, which could allow for mortgage write downs and penalties that would be used to reimburse victims of wrongful foreclosure.

Additional stakeholders in any proposed settlement include private mortgage insurance companies and the Veterans Administration, which are also liable for reimbursing lenders for defaulted mortgage loans. Each entity has its own interests, requirements and bottom line to protect; this complicates the process of reaching a final settlement.

Preventing foreclosure: Don’t procrastinate

When financial difficulties occur, it’s essential not to procrastinate. Call your mortgage lender right away, or seek help elsewhere. Mortgage lenders may not provide assistance until your mortgage payments  become one to two months delinquent, but contacting  your mortgage lender or a housing counseling agency immediately demonstrates your cooperation and interest in saving your home.

Homeowners wanting assistance with their mortgage loans can contact FHA approved housing counselors for more information about foreclosure prevention options.

Full post as published by FHA Mortgage Guide on February 24, 2011 (boomark / email).