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Obama proposes FHA refi plan

By Polyana da Costa ·
Wednesday, February 1, 2012
Posted: 1 pm ET

President Barack Obama has proposed allowing underwater homeowners to refinance their mortgages with FHA-insured loans. The proposed program would extend today's low rates to homeowners who owe more than their homes are worth.

The plan would be similar to the Home Affordable Refinance Program, or HARP, but it would apply to private mortgages that are not owned by Fannie Mae or Freddie Mac. HARP allows refinances only for homeowners whose loans are owned by the two agencies.

"I am sending Congress a plan that will give every responsible homeowner in America the chance to save about $3,000 a year on their mortgage by refinancing at historically low rates," Obama said during a speech in Falls Church, Va. "No more red tape. No more runaround from the banks."

The proposed program would also require lenders to reduce the principal of mortgages that are greater than 140 percent of the value of the home.

Plan aimed at borrowers who pay the mortgage

Obama says this plan is not a reward to borrowers who took out mortgages they couldn't afford. This is an effort to help millions of borrowers who are current on their mortgages but can't benefit from the current low mortgage rates because their homes have lost value.

"I want to be clear: This plan, like the other actions we've taken, will not help the neighbors down the street who bought a house they couldn't afford, then walked away and left a foreclosed home behind," he says.

To qualify for the program, homeowners would have to be current on their mortgages and not have missed a payment in the past six months. That's the same rule applied to HARP 2.0, a revamped refinance program that was announced late last year but has yet to go into effect because lenders say they are waiting for Fannie and Freddie to update their automated underwriting system with the new rules.

Refi plan has support, but is it realistic?

Advocates for borrowers and the housing industry welcomed Obama's latest proposal.

"We are very positive about it," says Barry Zigas, director of housing policy for Consumer Federation of America. "This is something that is needed and has been overdue."

Rob Nunziata, president of FBC Mortgage in Orlando, Fla., agrees and says, if approved, the program would help tens of thousands of homeowners in hard-hit states such as Florida. He says he has been swamped with calls from underwater borrowers who are current on their loans and want to refinance through HARP, but often the borrowers are disappointed to learn their mortgages are not owned by Fannie or Freddie.

"They are going to be very happy when this program becomes official," he says.

The plan would help an estimated 3.5 million homeowners who are underwater, the administration says. But don't get your hopes up yet. It's too early to tell if Congress will actually approve the program, especially because of its funding method.

Program would be funded by banks

The proposed refinance program would cost about $5 billion to $10 billion. It would be funded through "a small fee on the largest financial institutions will make sure that it doesn't add to the deficit," Obama says.

The lending industry will likely fight that part of the proposal and try to persuade Congress to kill or change the program.

Zigas says the program and the fee are "reasonable," and lenders should consider paying the price because the plan benefits them, as well.

"The lenders are going to be the major beneficiaries of this by having these loans guaranteed (by the FHA), which they currently do not have," he says.

The plan could also help avoid additional loan defaults and foreclosures, Nunziata says.

"If the borrower is current on the loan I think it makes sense to give them the opportunity to refinance," he says. "Otherwise (if they) stop making payments (it) will continue to exacerbate the current housing problems."

More for FHA

Critics of the proposal say its imprudent to increase the already high volume of loans insured by the Federal Housing Administration.

"I think everyone would like to see FHA's share of the market shrink, but in the absence of the private market the FHA plays a critical role in making financing available," Zigas says.

The Mortgage Bankers Association supports Obama's plan, according to a statement issued shortly after the speech.

"I want to commend the administration for recognizing that more can be done get our housing market on track," says David H. Stevens, president and CEO of the MBA. "The programs announced today will give lenders and other stakeholders additional tools to help borrowers and foster a renewed confidence in our real-estate finance system."

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March 24, 2012 at 11:48 pm

Pass the bill already! I am stuck with a BofA mortgage, and they have been unwilling to work with me on adjusting my interest rate. They have held my loan for 6 years, and during that time I have been current on my payments. After they jerked me around for 6 months (loosing paperwork, etc), I did not qualify for mortgage assistance. Why shouldn't those reliable homeowners get a break, they bailed out everyone else. Big banks should foot the bill, their crooked practices got us into this mess!

February 24, 2012 at 8:07 pm

just looking into this whole refi program now. Is FHA different from Fannie and/or Freddie? I currently have an FHA fixed mortgage, current with my payments, very good credit, and owe approximately $20,000 - $30,000 more than what my house is worth today. can someone explain in a nutshell how this plan/program would help me out?

Donna f
February 03, 2012 at 10:19 pm

I have the same issue as KW. Still not everyone underwater will qualify. The home can still be thousands underwater plus don't forget some people put very large down payments. They should consider what was paid for the property, because we have lost our down payments too. Where did they come up with 140 LTV ? If your underwater, Your underwater.
Maybe I just don't get it. We have an interest only loan. HELP!!!!!

February 03, 2012 at 6:53 pm

FHA mortgage always pay on time never late but i was told i cant refinance because I owe more than my home is worth If this prposal gets passed it will be the greatesttttttttt!!!!!!! I will be at the bank the day its passed to refinance and take advantage of the lower interest rates! !!!! Or if it doesnt I'm leaving this house walking AWAY!! Done with the greedy Banks! OBAMA is a great president:) He has my vote!

Donna f
February 01, 2012 at 11:27 pm

We purchased for 776 thousand , put 170 thousand down ,owe approx. 608 thousand. properties are listed for 400 - 500 thousand. where do I stand?

Banking Dude
February 01, 2012 at 6:55 pm

Ahhhhh, but there is a catch to this half baked, ill-conceived plan (perhaps plot is a better term). Note that "The proposed program would also require lenders to reduce the principal of mortgages that are greater than 140 percent of the value of the home."

Note that any "write down" of a loan automatically triggers a taxable event for the borrower. The "write down" amount must be reported as ordinary income by the borrower in the year of the "write down". The lenders writing down the debt are required to file a 1099 for the amount of the write down. Consider this somewhat extreme circumstance, but one that surely exists:

Mr. & Mrs. Smith have a $700,000 mortgage on their home which today is worth only $235,000. They take advantage of the refinancing aid package. The lender writes down the debt to 140% of current value resulting in a $371,000 write off. The lender issues a 1099 for that amount and Mr. & Mrs. Smith are now obligated to the IRS for $92,750 (assuming a 25% tax bracket) in tax immediately. Additionally, even though Mr. Smith is unemployed and Mrs. Smith's job grosses $45,000 per year, they are now above Mr. Obama's threshold of $250,000 annual income and therefore subject to a tax increase or some other special assessment. And, of course, this new tax obligation results in the Smith's inability to repay the refi. Ultimately, the lender is forced to foreclose anyway and books an additional loss of the 40% over-market value built into the refi. The Smith's enjoy another windfall of phantom ordinary income equal to $136,000 and anxiously wait by their mailbox for delivery of yet another 1099.

February 01, 2012 at 3:43 pm

The proposed program would also require lenders to reduce the principal of mortgages that are greater than 140 percent of the value of the home."

Really!, that's not even part of HARP2.0. I don't see it happening, but if it does, it better be fair to all, or more will just walk.

John Q Taxpayer
February 01, 2012 at 3:34 pm

When will people learn that a "fee" forced upon a business gets passed along to the customer? It's no different than a tax.