An idea that has been gaining popularity in Washington with both Democrats and Republicans is a new bill that would require lenders to allow troubled homeowners to refinance even if they are upside down (owe more than the home is worth) now. Some of the plans have banks allowing homeowners to refinance 85% of the current value of a home and forgiving the original full debt. There was an interesting article at MarketWatch recently on the developing plan. Here are some excerpts:
WASHINGTON (MarketWatch) — While the White House wants to avoid moves it sees as bailing out irresponsible mortgage borrowers, observers say it’s likely that lawmakers looking to be reelected this year will expand the reach of the Federal Housing Administration to keep more borrowers in their homes.
The House and Senate are trying to figure out the right way to widen the reach of the Depression-era agency, with Democrats favoring a large new financial responsibility, a move that concerns conservatives. But there are areas where consensus is developing, such as helping troubled borrowers to stay in their homes by encouraging lenders to write down loan values — a move that the Bush administration advocated last week through its targeted FHASecure program.
“We do think it’s a good development that the White House is agreeing to work with consumers with blemished credit,” said David Berenbaum, executive vice president with the National Community Reinvestment Coalition, a fair-lending advocate.
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“Legislatively it is our hope that a major commitment will be made to keep America’s working families in their homes,” Berenbaum said.
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On Wednesday the Senate Banking Committee heard from experts about foreclosure prevention. A plan from Chris Dodd, committee chairman, would create a fund at FHA to insure new, affordable mortgages for distressed homeowners.
“Under my proposal, no one — I repeat — no one, gets what could be described as a bailout,” Dodd said at the Wednesday hearing. “Lenders and investors will have to take a serious haircut to participate in the program. But, in return, they will receive more than what they would recover through foreclosure.”
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Details could also trip up passage of major FHA legislation. A key to most FHA plans is how great a write-down lenders would have to accept, said Allen Fishbein, director of credit and housing policy with the Consumer Federation of America.
“The situation is very much in flux,” Fishbein said. “Foreclosures are still continuing unabated and likely to increase in coming months, so you see support growing for some approach to use the FHA program to help borrowers avoid foreclosure.”