In August, President George Bush proposed a series of programs, called "FHA Secure," to help homeowners who are overburdened by their mortgages. Since then, the program has been modified to include additional provisions.
And now, Congress is increasingly under pressure to better regulate the mortgage industry and, perhaps, bail out homeowners with untenable loans. The changing and evolving plans to assist homeowners holding variable-rate mortgage loans that will be reset to a higher interest rate this year can be confusing - at best.
Bush's FHASecure plan enhanced the Federal Housing Administration (FHA) refinancing program. It extended refinancing options to families who were in default on their mortgages, but only if they previously had good credit and had been up to date on mortgage payments.
Under the program, homeowners can refinance their mortgages into fixed-rate FHA (government-insured) mortgages if they have missed loan payments because of a recent spike in adjustable-rate mortgage (ARM) interest rates that caused their total payments to jump. While better than nothing, the FHASecure proposal's measures help only a very small percentage of troubled mortgages.
Many argue that in addition to this help, there needs to be a correction in the market - and the government will not be able to help every person who is over-extended. Unfortunately, some homeowners have ignored the process of evaluating the right type of loan for their budget too long.
To address some of those concerns, homeowners may find it helpful to understand some of the key modifications to the President's plan:
A rate freeze for borrowers who will not be able to afford their adjustable mortgages. This will help some borrowers on the margin, but will not help the majority of subprime borrowers facing foreclosure. Several requirements will exclude most subprime borrowers. For instance, the borrower cannot be more than 30 days past due on the account at the timethe loan is changed, cannot have been more than 60 days late at any time in the past 12 months, must hold a loan whose interest rate will reset in 2008, and must demonstrate he/she is not capable of paying the new higher payment. Just about 100,000 to 250,000 loans will qualify for this program - fewer than 10 percent of loans whose rates will reset between now and the end of 2009.
Tax relief for forgiven debt (cancellation of debt income). If the lender forgives a portion of the loan balance as part of the foreclosure process, the forgiven debt has been considered taxable income. For example, if a home is worth $400,000, but the owner has a $500,000 mortgage, and the lender lets the owner walk away without paying the difference, the IRS considers the homeowner as having received $100,000 in value. That $100,000 would be taxable. Now, Bush and Congress have provided tax relief to individuals in this situation. This will simply lessen the pain for some consumers already in the dire financial situation of foreclosure.
