Should FHA Consider Mortgage Writedowns?

by Karen Lawson
February 17th, 2010

Although FHA has not announced plans to incorporate principle reductions, or mortgage writedowns, in its foreclosure prevention programs, the subject is worthy of debate. Critics of existing government sponsored mortgage relief programs note that unemployment and severely declining home values have made it impossible for many homeowners to make payments even after their mortgage rates are reduced and converted to stable fixed rates. Let’s consider the pros and cons of writing down principle balances on delinquent FHA loans.

FHA Actions Can Impact Communities-for Better or Worse

FHA is the primary source of mortgage loans for buyers and homeowners who don’t have enough cash or credit to qualify for conventional mortgage loans; FHA insures lenders making loans under its programs against losses caused by mortgage defaults and foreclosure. FHA is expecting the tide of foreclosures to increase due to findings that mortgage loans are most at risk of foreclosure during the second and third year of their terms. If such projections prove true, FHA is facing a critical situation, as it insured a large number of loans during 2007 and 2008, which increased its market share from about 2% to nearly 30% of US home loans.

Failing to reduce FHA mortgage foreclosures could be devastating to affected communities. Foreclosed homes blight neighborhoods, encourage crime, reduce home values, and cause losses of local property tax revenue. Some reasons that mortgage write downs could work:

  • Providing affordable payments: Writing down mortgage balances to below current appraised home values in addition to reducing mortgage rates, extending loan repayment terms, and converting adjustable rates and exotic mortgage features to fixed rates provides homeowners with affordable payments and allow them to see light at the end of the tunnel of high payments, negative equity, and unpredictable changes in mortgage features and rates.
  • Reducing foreclosures reduces community problems: Occupied homes are preferable to blocks of vacant and vandalized homes, which can prompt remaining homeowners to flee in fear for their safety and further losses in home value.

Again, FHA guidelines don’t currently allow mortgage writedowns, but if they did, what are the consequences?

FHA Guidelines Must Protect Taxpayers

  • FHA reserves falling far below legally required levels highlights the potential for FHA policies to impact taxpayers. FHA home loan programs are self-sustaining, but a wave of foreclosures could put FHA in bailout territory.
  • How would FHA handle losses resulting from mortgage writedowns? There is a chance for “double jeopardy” if mortgages with reduced balances are foreclosed.
  • Mortgage relief efforts are seen as a government handout by many; failure of foreclosure prevention efforts would create issues with public perception and could threaten FHA home loan programs.

No matter how FHA handles mortgage relief efforts, it’s walking a tightrope high above the court of pubic opinion.

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One Response to “Should FHA Consider Mortgage Writedowns?”

  1. Gina Pogol Says:

    The problem with mortgage writedowns is that most taxpayers would consider this vastly unfair — if their neighbor gets a loan written down to the home’s worth and they don’t it would fuel plenty of resentment and probably lead to a lot more strategic defaults — why would anyone feel bad about blowing off a mortgage when doing the right thing just makes you a chump? Lenders need to pursue deficiency judgments whenever possible to stop people from abandoning mortgages they can afford.

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