As congress moves closer to passing HR 5830 or Federal Housing Finance Regulatory Reform Act we must ask ourselves: will lenders choose to participate in this program? There are several factors lenders will need to look at in deciding if they want to refinance troubled homeowners. Many banks may choose not to use this program and move forward with a foreclosure! Regardless, this legislation will have a positive impact on our economy. Legislation is aimed at stabilizing markets and helping homeowners in trouble.
HR 5830 and Federal Housing Finance Regulatory Reform Act accomplish the same result from an economic prospective. They both allow FHA to insure $300 billion dollars in new loans to refinance troubled homeowners. This will act as fiscal stimulus to our economy which can only help.
Many lenders may choose to not refinance homeowners with the new FHA program and instead choose to foreclose. The reason is most troubled homeowners have loans that where 100% financing or sub-prime. These types of loans required mortgage insurance. What this means is that lenders were insured for 20% to 30% of the original mortgage amount.
Why is this important?
Let’s look at an example. Suppose a lender lent $100k to a homeowner. Because the homeowner did not have good credit (or for a few other reasons) the lender required them to purchase mortgage insurance which would cover 30% of the loan value (i.e. $30k). Now that the homeowner has defaulted on the loan the lender knows that she will receive $30k from insurance policy. In addition, the current market value of the home is $100k. So the lender is aware that if she forecloses on the property she will recoup all of her money because she can sell the house on the market for less than it is worth and still come out okay. By this example you can see it is less costly for the lender to foreclose than to write-down the loan or refinance to a smaller loan and loose money.
The only markets where lenders will take advantage of the FHA program will be in markets where prices are falling. In these markets it makes sense for lenders to take advantage of the new program because they have no assurance that they will be able to resell homes in a real estate markets where prices are falling. In this case, it would benefit the lender to cut losses and write down the loan with a new FHA refinance.
Even if many lenders choose not to take advantage of new FHA program it will still have a positive effect on our economy. The $300 billion being added to markets will provide stimulus and confidence for mortgage and real estate markets. Homeowners will take advantage of the program which will prevent many foreclosures that would have taken place without the FHA assistance. More importantly the program will provide price stability to many falling real estate markets.
HR 5830 and Federal Housing Finance Regulatory Reform Act are positive acts by congress to help homeowners and our economy. These reforms will assist our faltering economy by allowing FHA to inject $300 billion into our economy in order to boost us out of the current recession. Although there are many critics overall, this is something our country needs. Although not all lenders will use this new program, its positive affect will still play out in our economy over the next year. Let’s hope that it makes it into law!
Cliff Pape
Home-Buddies