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Government Foreclosure Rescue Plans are in the Works
Officials in Washington are busy crafting comprehensive rescue plans to help homeowners and revive a troubled housing market.
The Federal Housing Administration (FHA) has already stepped into a greater role as part of the government’s economic stimulus and real estate revitalization effort. The agency has recently experienced a substantial increase in the number of conventional borrowers refinancing into FHA-supported products. Refinancing business has tripled within the past two years at the FHA, as consumers seek more affordable loans with smaller down payments and lower interest rates.
Two significant events at the agency target homeowners seeking affordable loans and alternatives to costly adjustable rate mortgages. The most recent is a change in the amount of mortgage money that the FHA can insure.
Limits for FHA-insured loans were adjusted a month or two ago to compensate for extreme inflation in the housing market during the last bull market. As the housing bubble expanded, so did home values, so that the medium price of a home nationwide jumped considerably. In pricier regions like California, the average home now costs around half a million dollars. So the FHA was given permission to raise their cap from a rather outdated $362,790 to $729,750. The new loan limits help not only buyers but also homeowners wishing to refinance more expensive properties.
The other big initiative, supported by the Bush administration and announced at the end of 2007, is a project dubbed FHASecure. Under FHASecure, about a quarter of a million households will avoid foreclosure by refinancing with FHA-insured loans. FHASecure lets homeowners with strong credit histories refinance with attractive rates and terms, as long as they were making timely mortgage payments before their loans reset and triggered defaults.
One of the most ambitious and hotly debated plans is one now being argued in Congress that was conceived by Representative Barney Frank, the Chairman of the powerful Financial Services Committee. Under his proposed plan, the government would inject some $300 billion into the sagging housing and mortgage markets by expanding the jurisdiction of the FHA to insure mortgages and the refinance of existing mortgage loans.
To try to ease the impact on taxpayers, the Frank proposal also includes provisions for adding various fees and small closing costs to these loans, so that borrowers would help pay for the federal insurance. The most punitive fee would penalize those who use the loans to refinance homes but then sell them for a profit, and was added to the plan to discourage people from using the loans to “flip” houses for quick cash. If someone sells during the first year, for example, they will pay a penalty equal to all of the profit they derive from the sale. During the second year of the new mortgage they would have to pay 80 percent of their profits back to the FHA, and the fees would gradually diminish through the fifth year. After five years of servicing the loan, homeowners who sell will be charged a so-called “exit fee” of three percent of any profit they make.
While some see the exit fee as an imposition on consumers, most agree with it because it creates a method for the FHA – and taxpayers – to share in a real estate market rebound. By helping homeowners avoid foreclosure now, in other words, the FHA becomes entitled to a small stake in any equity that accumulates in the future.

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