House Financial Services Committee Chairman Barney Frank has proposed new legislation designed to address the significant rise in mortgage foreclosures by allowing the Federal Housing Administration (FHA) to insure and guarantee refinanced mortgages that have been significantly written down by mortgage holders and lenders.
The FHA Housing Stabilization & Homeownership Retention Act would ‘permit FHA to provide [up to $300 billion] in new guarantees that would help to refinance at-risk borrowers into viable mortgages,’ the bill's draft text states. ‘In exchange for the acceptance of a substantial write-down of principal, the existing lender or mortgage holder would receive a short payment from the proceeds of a new FHA loan if the restructured loan would result in terms that the borrower can reasonably be expected to pay.’
‘The existing lender or mortgage holder will have a cash payment and no further credit exposure to the borrower,’ the bill continues. ‘This could potentially refinance between 1 and 2 million loans (and help these families stay in their homes), protect neighborhoods and help stabilize the housing market.’
Eligibility requirements would limit the program to owner-occupied principal residences, and the senior loan being refinanced must have been originated between Jan. 1, 2005, and July 1, 2007. Furthermore, the borrower must have had a mortgage debt-to-income ratio of no less that 40% as of March 1, 2008, and must certify that he/she has not intentionally defaulted on existing mortgage(s), the bill notes.