Loan Modification

Mandatory foreclosure intervention makes FHA a better loan

By Gina Pogol

One of the chief sources of homeowner frustration with mortgage foreclosure prevention programs is the seemingly arbitrary way they are handed out, not to mention the way mortgage servicers appear to get to make up the rules themselves. Throw in the fact that such programs are optional even for lenders that took advantage of bailout funds (provided courtesy of taxpayers) and you have a recipe for despair.

FHA borrowers, however, have less frustration on that score and are less likely to end up in foreclosure when other solutions could be found.

That’s because FHA mortgages are insured by the government, and HUD is not going to kick out a mortgage insurance payment to make a lender whole until the lender has exhausted a predefined list of solutions to keep the borrowers in their home. Because HUD, not the FHA lender, gets to make the rules, FHA mortgages only get foreclosed when other steps have been tried first or it’s very clear that they won’t work. The lenders don’t get to apply an NPV test which pretty much guarantees that if you are not underwater you won’t get a loan mod, or which comes up with a stupid conclusion like “You don’t earn enough top make a modified payment of $1,500 a month, so we’re going to deny your mod and force you to make your current payment of $2,200 a month.”

FHA foreclosure prevention efforts

FHA has to operate within a different set of rules than conventional lenders (for example they are not allowed to reduce the principal balance of mortgages because it’s prohibited by law). But FHA has a long list of solutions that can be implemented fairly quickly and it requires them to be tried before allowing foreclosure. And you don’t have to be in default on your loan to qualify for help.

You do have to show that you are experiencing a financial hardship or change in family circumstances, such as unemployment, reduced job hours, reduced pay, or a decline in self-employed business earnings, death in family, serious or chronic illness, or permanent or short-term disability.

Foreclosure prevention can take the form of a formal or informal forbearance agreement, in which you are allowed to postpone, reduce or skip payment(s) due on a loan for a limited and specific time period (informal agreements are limited to three months max).

FHA-HAMP involves modifying the terms of your mortgage after successfully completing a four month trial payment period.  Your new payment is determined by your income, like regular HAMP, and can be achieved by lowering the interest rate,  and deferral (not charging interest on part of the principal) but never by principal reduction and the loan term cannot be extended beyond thirty years.

Partial claim means the mortgage servicer can collect part of what would be paid in the event of a foreclosure but it won’t actually foreclose on you. Up to 12 months of PITI can be included in the partial claim to bring your loan current, and / or up to 30% of outstanding principal balance may be deferred (this means that no interest is charged on this part of the balance and repayment is not required until the home is sold).

FHA’s success in foreclosure prevention (According to the Mortgage Bankers Association, FHA loans have a lower foreclosure rate than non-FHA loans. At the end of the third fiscal quarter of 2010, the foreclosure rate for all loans was 4.39 percent compared to 3.32 percent for FHA loans.) can probably be attributed to the fact that lenders are required to participate, not just “encouraged” by government officials. Maybe HUD should just run everything…

Full post as published by FHA Mortgage Guide on January 20, 2011 (boomark / email).