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Homeowners Could Get New Federal Loans

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WASHINGTON — Homeowners staggering under mounting mortgage debt and facing foreclosure could get cheaper, government-backed loans under Democrats' housing rescue plan.

But first, lenders would have to agree to wipe out part of their debt. And the borrowers would have to show they could afford the new mortgage. They also would have to agree to share any future profits on the home with the government.

The plan would be a massive expansion of the Federal Housing Administration, the Depression-era mortgage insurer. FHA would take on $300 billion in new loans for as many as 1 million distressed homeowners, most of whom otherwise wouldn't qualify for a government-backed loan.

Taxpayer dollars would be at risk should borrowers default on their new mortgages. The FHA, however, would have some non-taxpayer money to cover losses. The agency would collect a 3 percent fee on the refinanced loans, as well as annual 1.5-percent premiums, and share a portion of borrowers' future proceeds if the property is refinanced again in the future or sold.

The measure by Rep. Barney Frank, D-Mass., the House Financial Services Committee chairman, is scheduled for a committee vote this week and is expected to move through the House in early May. A similar bill is taking shape in the Senate. The Bush administration is backing the same concept, although on a much smaller scale.

By relaxing FHA standards, Frank's bill would allow a whole new swath of homeowners who are currently too financially strapped to qualify for a government-insured loan to do so. That includes people who are badly behind on their mortgage payments, have poor credit and hefty debt, and those who owe more than their homes are worth.

It's unclear how many would qualify, however, even under far looser FHA standards. Also an open question: whether mortgage servicers would agree to participate in the voluntary program.

Today, a homeowner who has fallen behind on the mortgage might get a chance to work with his loan officer to lower the payments to an affordable amount. A homeowner who couldn't keep up would likely face foreclosure.

Frank's two-year program is designed to offer another option that would let borrowers keep their homes and give mortgage holders a chance to get a heftier chunk of what they're owed than they would with foreclosure. Typically, mortgage holders lose up to 40 percent on foreclosures.

To take part, a loan officer could contact an FHA-approved lender, who would calculate the terms of an affordable mortgage the borrower could be expected to repay. If the existing mortgage holder agreed to take a substantial loss _ he would get no more than 85 percent of the home's value and pay FHA fees and closing costs _ the FHA lender would pay off the loan.

The new, fixed-rate loan would be for no more than 90 percent of the home's value.

The idea behind the plan is that mortgage holders could do better accepting a loss now in exchange for getting a delinquent borrower off their hands than they would if they went to foreclosure. In some cases, however, a homeowner will be so financially strapped that the lender would stand to lose too much from the deal and would opt to foreclose instead.

Critics say mortgage holders would have little incentive to participate in any case, because they would have no chance of recovering a substantial chunk of what they're owed.

To qualify, borrowers would have to be devoting at least 35 percent of their monthly pretax income to a mortgage payment on loans originated before Jan. 1, 2008.

With the new loan, FHA could allow a borrower's total monthly debt load _ including student loan, credit card and car payments _ to reach as high as 55 percent of monthly net income if he made at least six months of timely mortgage payments on the original mortgage. That's a substantially looser standard than the agency's current 43 percent limit.

Homeowners also would have to share with the FHA any profit or gain in any future refinancing or from selling their homes. FHA would get at least 3 percent of the original loan amount when the borrower sold or refinanced. To discourage borrowers from using the program to quickly "flip" their house for a profit, FHA would reap all of the proceeds if the sale or refinance was within a year. That percentage declines 20 percent annually.

The plan is aimed at homeowners hit by the double whammy of the credit crunch and housing downturn. Many of them have subprime loans that are resetting at much higher rates, and can't sell or qualify for a new loan because _ due to slumping housing prices _ they owe more than their homes are worth. That is known as being "underwater."

"It won't help everybody, but would help some people who are stuck. They can't sell or refinance because they're under water. They've gone to their servicer and cannot get a modification of their loan. Now the only option is to lose the house to foreclosure," said Eric Stein of the Center for Responsible Lending, a nonpartisan research and consumer advocacy group.

The program would only be open to owner-occupied properties; not second homes or investment properties.

Architects of the plan believe mortgage holders would likely give their borrowers broad guidelines for who might qualify for the new program, rather than decide on a loan-by-loan basis.

Key elements of the program will be decided by a new oversight board comprised of officials from the Federal Reserve and the departments of Treasury and Housing and Urban Development.

One major task of the board will be to figure out how to compensate those who hold secondary claims on a home, who would walk away with no more than 1 percent of the home's value.

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The bill is H.R. 5830.

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On the Net:

Congress: http://thomas.loc.gov

House Financial Services Committee bill summary: http://financialservices.house.gov/FHA.html