FHA here, FHA there, wherever you look it’s FHA these days. With the increase in loan limits, competitive loan rates and very low down payment requirements often times its the only loan program that makes sense in todays credit crunch. And it appears the Federal government is looking to expand the reach of this program and try to help borrowers in distressed situations.

Last week,a key committee in the House passed H.R. 5830, otherwise known as the FHA “Short Pay” Loans Bill. The main provision in this bill would allow FHA to insure loans for troubled borrowers. This bill seeks to insurance upto $300 billion in home mortgages. According to MortgageNewsDaily:

…the FHA will guarantee a new loan to a troubled borrower if the existing lender will agree to accept a short payment (i.e. less than the outstanding balance of the loan) in full payment of the old loan. The new loan would be limited to no more than 90 percent of the property’s value and must have terms that the borrower can reasonably be expected to pay. When the borrower sells or refinances the home the borrower will pay from any profits either an exit fee equal to 3 percent of the original loan amount or a declining percentage of any net proceeds attributable to home appreciation (from 100 percent in year one to 50 percent in years four and beyond,) whichever is larger. The government, therefore, would only be at risk if the borrower defaults on the new loan in which case he would lose the house.

Other than helping the homeowner stay in their house I don’t see what else it gives them. Their credit will still tank - since they did a short sale refinance. Which means higher interest rates on anything else they ever decide to use credit for - such as a car or credit card. However, being able to keep your home is a huge boost.

Sounds good right? Well not exactly is my answer. Citigroup Global Markets research released a report last Friday stating that this move by the government could go either way:

The analysts — weighing the benefits of insurance premiums and interest cost paid against re-default rates and estimated losses on foreclosed homes — calculated the government could earn as much as $31 billion or lose up to $20 billion.

Keep in mind Congressional leaders estimate the program to cost between $3 billion and $6 billion. Wow. Does anybody even understand the scale of these expenses anymore? As Senator Everett Dirksen once said “a billion here and a billion there, and soon you’re talking about real money.”

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Tags: FHA, H.R. 5830, Refinances
Categories: Congress and Government, FHA, Mortgages