House Underwater Response

Here's a detailed response I received via email to this morning's help a reader question.

This is what your reader is referring to. I am somewhat of an expert on this.

Basic idea is to allow $300bn of loans to be modified via this kind of process:

(1) Bank or mortgage servicer decides they’re better off taking a “short refi” for less than the house is worth than to continue down the traditional mortgage servicing path.  This would only happen on loans that they believe have a high probability to be foreclosed upon.

(2) FHA program allows loan to be refinanced at a 30yr fixed rate with FHA (govt) guarantee, backstopped by funding from FNMA and FHLMC.  Borrower only qualifies for this if they meet other FHA constraints on creditworthiness.

(3) Borrower is “off the hook” for the first mortgage, and now has a mortgage at 80% LTV based on current appraisal at a fixed 30yr rate, but is paying something like 1.5% premium for the FHA insurance.

In other words, even if/when this proposal passes (likely right before the July 4 recess), and even if the president signs it (not a certainty), it is a voluntary program and will only effect people who appear likely to be future foreclosures with very high potential loss severities for the servicer.  Meanwhile, despite looking like such a “bad risk” from that perspective, they must look creditworthy enough to qualify for the FHA deal.

So even if this thing passes, it is nearly impossible to tell whether your reader has a chance to benefit from it.  Servicers have a legal obligation to maximize the net present value of the mortgage payments to their trust, and they will be on the lookout for people trying to game the system and force their way into this deal.

I would recommend to your reader that he not count on help from this program and continue making his payments as usual.  But he should keep his eyes on the news, and if the bill is signed by the president, re-evaluate the situation at that time by seeing if he qualifies for an FHA loan at all, and if so, does his servicer have any reason to forgive some of his loan?  Remember its’ a purely voluntary program for servicers, they are still going to do whatever is in the best interests of the investors.  Reader should not get his hopes up unless he is really and truly in a situation where he cannot afford his mortgage payment, because unless that is the case, he’s unlikely to get his servicer to do this.

Comments

[don]

Re: "Borrower only qualifies for this if they meet other FHA constraints on creditworthiness"
What are the constraints?
Also, how would a lender determine "probability of foreclosure"?