New FHA foreclosure prevention plan to allow “cram downs” — sort of

If your mortgage is held or insured by the Federal Housing Administration (your servicer will know) you may now be able to get a reduction in mortgage principle of up to 30%, at least for a while.

Frustrated by the failure of the various foreclosure prevention programs to modify enough mortgages, the FHA has announced that it will let servicers cut principle up to 30% if that would bring payments down to 31% of income.  Up until now, only interest could be adjusted.

The catch is that when you sell or refinance the house, the FHA wants to get back its money, plus interest.  It is not clear what happens if the house sells for less than the total due.  Are you still liable or does the FHA permit a “short sale” and let you off the hook?  Don’t sign off until you know the answer to that question.

To qualify you must miss at least one payment.  That’s better than missing three payments as required by some other programs, but you cannot get any consideration until you have missed a payment.

I have no idea why the lenders took so long to get to “cram downs.”  They defeated Congress’s attempt to allow bankruptcy judges to do it.  But in my opinion, cram downs are usually better for the lender than foreclosures.

Look at the math.  If a house is worth, say $160,000 and has a $200,000 mortgage and the lender forecloses, they will lose at least $40,000 on the sale, plus broker’s fees, unpaid interest while everything is being processed, legal fees and the costs of maintenance while the house is on the market (which could be some time).  $70,000 total loss would not be unusual.

Now let’s say they “cram down” the mortgage to $160,000 and you resume payments, staying in your house.  They lose the interest on $40,000 until you sell or refinance the house.  Then they should get some or all of it back, plus the principle.  In the end they are unlikely to lose as much as $70,000 when all is said and done.

Sounds like “win-win” to me.  If you want to take advantage of this program, there is free help available from government sponsored non-profits

A list of local counselors is available from HUD.
You can also get names of approved  counseling organizations from the Hope website or by calling the HOPE HOTLINE at 888-995-4673.  The Neighborhood Assistance Corporation does this work too.

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