The Federal Housing Administration has changed some of its rules to help more distressed borrowers avoid foreclosure.
Lenders and servicers have until mid-February to adopt the new guidelines, which includes a series of revisions to the FHA's Loss Mitigation Home Retentions Options.
The program, which was first established in 1996, offered options to borrowers struggling to pay their mortgages. It has now been streamlined into a three-tier structure.
- Special forbearance: allows unemployed borrowers or those with reduced income to have their mortgage payments temporarily suspended or reduced.
- Permanent loan modification: for borrowers whose income were affected but can still afford the payments on the modified mortgage.
- FHA's Home Affordable Modification Program, or HAMP: a combination of a loan modification with a temporary reduction of the mortgage balance. The FHA does not allow lenders to offer borrowers any principal reduction, but under HAMP, the lender can advance funds on behalf of the borrower to bring the loan current and to reduce the balance. The borrower has to sign a promissory note for the amount advanced. It's as if the lender offered the borrower a new loan with no interest to reduce the balance and payments of the original loan. That promissory note has to be repaid when the homeowner sells the house or finishes paying off the first mortgage.
Among the many changes, the FHA has eliminated the requirement that prevented borrowers who were more than a year past due on their mortgages from qualifying for HAMP.
Borrowers who were approved for HAMP but failed to make the required trial payments before a permanent modification was granted will also be allowed to reapply for the program if their financial circumstances change. Under the old rules, borrowers were only allowed one chance to successfully complete the program.
Carol Galante, FHA commissioner, says the changes are designed to help borrowers and also reduced losses to the FHA from foreclosures.
"Not only are we taking steps to make sure more borrowers can benefit from FHA loss-mitigation assistance, but we are also targeting our assistance to provide more sustainable payments for borrowers so that they are successful in retaining their homes over the long term," she says.
It's too early to tell how many borrowers will actually benefit from these changes, but some industry experts are optimistic about the announcement.
"I believe the changes will provide more borrower opportunities for quicker solutions and align better with other agency programs," says Loren Morris, senior vice president of Retreat Capital Management, a company that offers management and consulting services to the mortgage industry.
FHA borrowers, please let me know how the new rules work out for you. You can follow me on Twitter @Polyanad.