FHA to Announce Principal Reduction Program

by Divina K. Westerfield, Esq. on March 26, 2010

The FHA is now jumping on board the principal reduction train and is about to issue new HAMP guidelines which will encourage principal reductions with lenders who voluntarily participate.  The Government’s goal is said to stabilize the housing markets.

In a HUD news release today, FHA announced new refinements to HAMP and to FHA programs designed to help unemployed, underwater borrowers.  The announcement stated that,

“The program modifications will expand flexibility for mortgage servicers and originators to assist more unemployed homeowners and to help more people who owe more on their mortgage than their home is worth because their local markets saw large declines in home values.”

FHA estimated 3 to 4 million homeowners may be eligible to participate in the program that is scheduled to end in 2012.  Costs will be shared by the private sectors and the Federal Government, which will tap into the $50 billion allocation for housing programs under the Trouble Asset Relief Program (TARP).

The FHA focused on “giving responsible households an opportunity to remain in their homes when possible while they get back up on their feet, or to relocate to a more sustainable living situation.”  While FHA’s intent is not to help everyone, it specifically will not help investors, speculators, those with home with mortgages over $729,750, or those with second homes in an underwater position.

Eligibility will be for those meeting the following criteria:

  • Owner occupied principal residence
  • Mortgage balance less than $729,750
  • Owe monthly mortgage payments greater than 31% of their income
  • Demonstrate a financial hardship – which could include just being underwater in their mortgage!

Lenders who chose to participate in this voluntary program may now restructure loans for some families who owe more than their home is worth.

CNN interviewed FHA Commissioner, David Stevens who said, even those that have been making payments on their loan could take advantage of the program, stating “It’s important to get that equity right-sized.”

The question is how many can qualify if they have had a financial hardship and still be current on their home.  Some of you know that in addition to my own investments and activities of National Note Association, I’ve been an active counselor of bankruptcy clients, and that many people who want to keep their home may be current on the home, but not current on other bills.  So the question is if their credit is now below 600 due to the financial hardship, and they have missed payments on credit cards and other bills, will they still qualify for this FHA principal reduction?  Hard to say, isn’t it?  Will have to review the guidelines when they are issued – which is expected in several months.

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