FHA Mortgage Guide

If you have an FHA loan you can marvel at how the rest of the financial world does business.

The FHA has a large foreclosure prevention program, and now federal regulators are trying to get the private sector to follow suit.

The five major federal regulators default.htm”>released a statement today explaining that private-sector lenders should be pro-active and try to help borrowers before they face foreclosure. This, of course, is going to upset a lot of hedge-fund managers, but for the rest of humanity the new insistence on common sense should be welcomed.

Earlier we posted contact information for FHA and VA borrowers who are facing tough times, as well as a private-sector list pulled together by blogger Moe Bedard.

Below is the core position set out by federal regulators.

Treasury has indicated that servicers of loans in qualifying securitization vehicles may modify the terms of the loans before an actual delinquency or default when default is reasonably foreseeable, consistent with Real Estate Mortgage Investment Conduit tax rules.

Servicers are encouraged to use the authority that they have under the governing securitization documents to take appropriate steps when an increased risk of default is identified, including: proactively identifying borrowers at heightened risk of delinquency or default, such as those with impending interest rate resets; contacting borrowers to assess their ability to repay; assessing whether there is a reasonable basis to conclude that default is “reasonably foreseeable”; and exploring, where appropriate, a loss mitigation strategy that avoids foreclosure or other actions that result in a loss of homeownership.

Loss mitigation techniques that preserve homeownership are generally less costly than foreclosure, particularly when applied before default. Prudent loss mitigation strategies may include loan modifications; deferral of payments; extension of loan maturities; conversion of adjustable-rate mortgages into fixed-rate or fully indexed, fully amortizing adjustable-rate mortgages; capitalization of delinquent amounts; or any combination of these. As one example, servicers have been converting hybrid adjustable-rate mortgages into fixed-rate loans. Where appropriate, servicers are encouraged to apply loss mitigation techniques that result in mortgage obligations that the borrower can meet in a sustained manner over the long term.

In evaluating loss mitigation techniques, servicers should consider the borrower’s ability to repay the modified obligation to final maturity according to its terms, taking into account the borrower’s total monthly housing-related payments (including principal, interest, taxes, and insurance, commonly referred to as “PITI” as a percentage of the borrower’s gross monthly income (referred to as the debt-to-income or “DTI” ratio). Attention should also be given to the borrower’s other obligations and resources, as well as additional factors that could affect the borrower’s capacity and propensity to repay. Servicers have indicated that a borrower with a high DTI ratio is more likely to encounter difficulties in meeting mortgage obligations.

Some loan modifications or other strategies, such as a reduction or forgiveness of principal, may result in additional tax liabilities for the borrower that should be included in any assessment of the borrower’s ability to meet future obligations.

When appropriate, servicers are encouraged to refer borrowers to qualified non-profit and other homeownership counseling services and/or to government programs, such as those administered by the Federal Housing Administration, which may be able to work with all parties to avoid unnecessary foreclosures. When considering and implementing loss mitigation strategies, servicers are expected to treat consumers fairly and to adhere to all applicable legal requirements.

Check out these FHA resources for more information

This entry was posted on Tuesday, September 4th, 2007 at 12:33 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.