US Government pushing loan forgiveness for “underwater” borrowers

There is some relief coming from the Obama administration for home owners who owe more on their properties than their homes are worth.

 The Federal Housing Administration will begin permitting lenders to give refinanced loans backed by the government as of this Tuesday. In return for the government’s backing, the lenders will be required to forgive at least 10% of the original mortgage amount. Investors who have control over the mortgages as part of their large portfolios will select which borrowers are invited to participate.

This is the latest effort by the administration to address the housing bust. Homeowners who had been taking on debt to support a lifestyle built around the assumption of increasing value in their equity have been in an impossible quandary since the contraction of the investment markets, the economy and housing prices. These homeowners are referred to as “underwater” borrowers because their debts and interest obligations exceed their income and equity- they are simply drowning in their debts. The challenge for the administration is too keep the homeowners under a roof and still making payments to their brokers.

The Obama administration expects between 500,000 to 1,000,000 homeowners could benefit from the program. However, analyst suggest the execution of this plan will be challenging. Nearly half of the 1.3 million homeowners enrolled in the Obama administration’ main mortgage-relief program have already fallen out because of lost paperwork and complaints that the program is a bureaucratic nightmare. The new refinancing program allows investors in mortgage-backed securities to evaluate their holdings and select borrowers that will bve offered refinanced mortgages guaranteed by the FHA. The hope is that loans that investors want to foreclose on will be instead be refinanced through the refinancing program.

Homeowners owing 40% more than the value of their homes may not find 10% enough enticement not to walk. Investors may prefer to foreclose on a homeowner with a high risk of default.

The program is funded with $14 billion from the Obama administration’s existing $75 billion mortgage assistance program. That money will be used to cover incentive payments to lenders and losses from borrowers who fall back into foreclosure.

The plan is limited to loans in which homeowners owe at least 15 percent more than their home’s current value.

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