FHA Foreclosure Plan Moves Money to Backend


It doesn’t make sense to refinance at-risk FHA loans due to higher interest rates, so the latest plan simply offers a reduction and extends the mortgage payoff date.

WASHINGTON – On May 31, the Federal Housing Administration (FHA) proposed a new plan to help mortgage borrowers behind on payments to get back on track. It works by temporarily reducing their monthly bills.

Under the plan, FHA essentially pays part of the homeowner’s monthly mortgage bill using its insurance fund. It then structures that repayment as a second loan that’s due after the first mortgage loan is paid off.

FHA wants to offer it to people who otherwise would not benefit from a traditional modification since, in most cases, that would involve trading in their lower rate for a higher one.

“We see a lot of people having to get modifications that either don’t reduce their payment or in some cases raise their payment,” says Julia Gordon, the assistant secretary for housing at the U.S. Department of Housing and Urban Development. “That’s not going to have the success rate over time that we’d like to see.”

For a period of up to five years per the plan, the monthly principal and interest payment may drop as much as 25%, and the total FHA supplement could be as much as 30% of the loan balance. FHA officials say the government would get repaid at the end of the loan term, and that helping borrowers get back on track under this system will cost less than following through with a foreclosure.

The proposal is currently open for public feedback. It will go into effect – perhaps under a modified version – sometime after the comment period ends.

Source: Wall Street Journal (05/31/23) Eisen, Ben

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