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Mortgage Loan Write-downs: Why FHA Guidelines Can’t Force Lender Cooperation

by Karen Lawson
April 14th, 2010

Government mortgage relief programs along with current FHA mortgage rates may offer distressed homeowners opportunities for getting back on track while saving their homes. Unfortunately for many homeowners, having a home equity loan can potentially represent an obstacle to getting foreclosure help or a new refinance mortgage.

FHA May Soon Offer New Refinancing Opportunity

The federal Making Home Affordable program and FHA are planning to offer an opportunity for eligible “underwater” homeowners to refinance their existing mortgage loans with FHA mortgage loans at a lower amount than their existing mortgage loans. In order to take advantage of this program, your mortgage balance must be higher than your home’s current value, and your mortgage lender would have to agree to write down your existing mortgage amount by at least 10. If you have a home equity loan or line of credit, your home equity lender would also have to agree to eliminate its lien against your property or reduce the home equity loan amount and sign a subordination agreement. These requirements can make the difference between getting mortgage help or not. Here’s why.

FHA Guidelines Don’t Require Mortgage Lenders to Participate: Although FHA guidelines require mortgage lenders to agree to a minimum 10% write-down of the mortgage balance, it cannot require lenders to do this. If your mortgage lender decides not to reduce your mortgage amount, you can’t qualify for an FHA refinance mortgage at a lower amount.

Home Equity Lenders May Not Cooperate: Home equity lenders may have no incentive to discount or release their Liens. If homeowners are delinquent on their first mortgage while keeping payments current on a home equity loan, the home equity lender has no incentive for taking a loss in favor of the first mortgage being modified or refinanced. The decision to take a loss on any type of loan is a business decision and mortgage and home equity lenders can refuse to reduce, release and/or subordinate their liens without providing a reason.

Mortgage Lenders Weigh Foreclosure Relief Results Against Foreclosure Losses

Mortgage lenders rarely break even on foreclosing mortgage loans; they usually lose thousands of dollars during the process of foreclosing a mortgage and taking title to a home. The bleeding doesn’t stop there, as most foreclosed properties are held as real estate owned (REO) for several months or more before being renovated and sold. Lenders approve foreclosure relief programs based on how much they can save as compared to foreclosing on a home. This is why it’s essential to contact your mortgage lender as soon as you miss a payment. Waiting several months reduces the lender’s potential savings and its incentive for considering alternatives to foreclosure.

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