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FHA Foreclosure Prevention Scores Big

by Peter G. Miller
July 26th, 2010

For all the talk about foreclosure prevention, the role of FHA loans in shoring up the housing market is generally not discussed or thoroughly ignored. This is now becoming difficult because the foreclosure-assistance numbers are simply too big.

How big?

The July housing scorecard is out from HUD and the role of the FHA is easy to see:

“HAMP permanent modifications are on pace, as more than 51,000 trial agreements graduated to permanent in June: Servicers report the number of homeowners receiving restructured mortgages has increased to a new total of 2.95 million, including more than 1.2 million homeowners under HAMP trial modifi cations and nearly 400,000 benefitting from FHA loss mitigation activities. However, cancellations from HAMP trial plans remain high as many borrowers who received temporary modifications were not able to meet eligibility requirements such as verifying their income and successfully making trial payments.”

Meanwhile, while HAMP has a high level of cancellations the FHA does not. HUD has reported that in fiscal 2009 — last year on the government calendar — “82.7 percent of the HUD-held loans that are 90 days or more delinquent were brought under control.”

Why is this important to FHA loan borrowers? Ah, let me explain.

Insurance Vs. Lending

We use the term “FHA loan” as if the FHA was making mortgages. It doesn’t. The loan you get that’s called an “FHA mortgage” is funded with private dollars. The FHA insures the mortgage, saying that if a borrower who meets FHA loan guidelines is financed by the private sector fails the FHA will step in and off-set the loss. Because FHA insurance is available lenders will make loans with little down, just 3.5% at this time.

There is a cost to borrowers for FHA insurance, that up-front mortgage insurance premium (2.25% of the loan amount) and an annual mortgage insurance premium (.55% of the outstanding loan amount, paid monthly).

Now let’s say something goes wrong.

The lender will get its money one way or the other — remember the lender is the beneficiary of FHA insurance.

And the FHA?

Well, it’s an insurance plan. HUD doesn’t want to pay insurance claims if they can be avoided and that means it wants to help borrowers avoid foreclosure. That’s the reason the FHA is busy trying to end delinquencies while distant loan owners who don’t shop in your ZIP code and have never seen the local middle school don’t care.

There’s no doubt — and there has been no doubt since 2007 — that the economy is in trouble. In terms of mortgage financing you want a loan with the best rates and terms — and you want a lender or insurance plan that shares your need to stay out of the foreclosure pool, that suffers if your loan goes bad. Little wonder people are turning to FHA loans in such large numbers.

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