Industry News

Making Mortgage Relief Work for You

David Bach The Automatic Millionaire

On Aug. 31, while many of us were getting ready for a long holiday weekend, President Bush addressed the nation about the mounting concerns in the housing market. His speech took place exactly one month before we'll see a record-breaking $50 billion in mortgages reset to a new rate.

That's right, in the month of October alone, many homeowners will be forced to pay higher monthly mortgage payments than they can reasonably afford. And while this number is staggering, it's not exactly new information -- it's been known for two years that the crisis was coming.

The Associated Press reports that, in all, 2 million homeowners have adjustable rate mortgages scheduled to reset by the end of 2008. Of those, the Federal Housing Administration (FHA) estimates that 500,000 could experience foreclosure.

Is Bush's Proposal Enough?

In my opinion, the president's proposal is an excellent start -- but will it offer enough help to those half-million families at risk of losing their homes?

Bush isn't proposing a direct bailout for homeowners who knowingly overextended themselves. Nor will the government be rescuing irresponsible lenders and speculative investors who bought homes to flip for a profit. As the president acknowledged, that would only encourage the problem to occur again.

Instead, Bush's proposal strikes a balance by offering:

• Temporary tax relief to ensure that cancelled mortgage debt on a refinanced mortgage isn't counted as income
• A foreclosure-avoidance initiative through homeowner education and outreach
• Ways to help responsible homeowners refinance through FHA loans offering a lower interest rate and lower monthly payments

Help for Those in Trouble

Among the president's new initiatives is the immediate introduction of a refinancing product called FHASecure. This product will now be offered through the FHA and offers help to homeowners who are already in default of their primary residence mortgage loans. Previously, the FHA would not insure refinanced loans from borrowers delinquent or in default, so this is a significant change.

There are specific criteria that must be met in order to qualify:

1. First and foremost, you must have a history of on-time mortgage payments before your teaser rate expired -- which means you must have a decent credit history.
2. Your interest rate must have reset after June 2005 but before December 2009.
3. You must have at least 3 percent cash or equity in your home.
4. You must have a sustained history of employment.
5. You must have sufficient income to make your mortgage payments.

Beefing Up the FHA

Since 1934, the FHA has helped more than 34 million people become homeowners -- not by lending them money directly, but by guaranteeing their loans. This reassures lenders who might otherwise be reluctant to make loans to buyers who don't have a lot of money. Borrowers have always paid a set price for this insurance.

The president's proposal seeks to introduce risk-based pricing, which will give borrowers with weaker credit more access to FHA loans. Rather than being denied an FHA loan, underserved borrowers will instead pay a slightly higher fee. This will allow them to refinance at a lower interest rate with more affordable monthly payments.

President Bush is also asking Congress to pass new legislation that would modernize the FHA. These proposed changes -- including lower down payment requirements and higher maximum loan limits -- would also help borrowers with weaker credit and lower incomes. Hopefully, Congress will act quickly.

Can the Fed Help?

Echoing the sentiments of President Bush, Federal Reserve Chairman Ben Bernanke also weighed in on the situation on Aug. 31. He stated that it's not the responsibility of the Fed to protect lenders and investors from the consequences of their actions.

However, he also acknowledged that developments in certain financial markets, including those currently emerging with mortgages, could have broad economic effects. As a result, the Federal Reserve will take those effects into account when determining policy.

Many believe the odds are growing that the Fed will cut the federal funds rate, now at 5.25 percent, by at least one-quarter percentage point on or before Sept. 18, its next regularly scheduled meeting. The Fed hasn't lowered this rate in four years.

That could be good news if you currently have an adjustable rate mortgage. Even a mild rate cut of .25 percent might mean a slightly lower payment for you now. A cut of .75 percent would create significant breathing room for those on a tight budget, and could potentially send the stock market on a tear. My prediction is that the rate will get cut between 25 and 50 basis points.

Other encouraging news came on the Tuesday after Labor Day, when the Fed put added pressure on loan-servicing companies to modify loan terms or defer payments for borrowers having trouble making their mortgage payments and facing default.

Take Action Now

With the combination of new and current programs, the FHA estimates that it will be able to help 240,000 American families avoid foreclosure.

Only lenders approved by the Federal Housing Administration can process an FHA loan for you. If your adjustable rate mortgage has reset or is about to reset, call your lender and ask if they offer FHA loans and find out whether you qualify. The FHA web site offers loads of additional information, and includes a search feature to find an approved lender in your area.

In two previous columns ("Adjusting to Higher Mortgage Payments" and "Six Steps to Avoiding Foreclosure"), I advised those of you with an adjustable rate mortgage that'll reset this year to call your lender and find out about refinancing options. Have you reviewed your mortgage documents and made that phone call yet?