Most Struggling Homeowners Meet Relief Criteria

Atlanta-A recent survey finds the majority of homeowners at risk of foreclosure will qualify for relief under the new federal housing bill that took effect Oct. 1.

Consumer Credit Counseling Service of Greater Atlanta reported that almost two-thirds of the homeowners who called for foreclosure prevention counseling in recent months "appear to meet the threshold requirements" for federal assistance through the new FHA program.

Signed into law by President Bush on July 30, the Housing and Economic Recovery Act of 2008 created the Hope for Homeowners program designed to stop homeowners from going into foreclosure. Mortgage lenders can allow at-risk borrowers to refinance their current mortgage into a new fixed-rate loan insured by the FHA.

"Our survey results indicate this new FHA program holds the potential to help a large number of Americans struggling to pay their mortgage," said Suzanne Boas, president of CCCS.

In late September, CCCS surveyed 591 people of which 381, or 65%, said they met five key eligibility criteria for the FHA-insured mortgage-refinancing program.

Among challenges faced by homeowners, however, is the voluntary-basis lender participation in the program, since due to the current crisis participation rates could be insufficient.

"Not everyone will be able to meet the terms. But if someone meets the basic criteria laid out in the housing bill, it would be worth a phone call to their lender to ask about the FHA program," Ms. Boas said.

The No. 1 challenge to participating in the FHA program, survey participants said, is that of being able to pay off a home-equity loan or second mortgage, a challenge that could affect many homeowners since up to 35% of respondents reported that their home secures more than one loan. Homeowners with a second mortgage or home-equity loan must pay it off to be able to qualify for the refinance program, CCCS said. "It is possible to pay off the second mortgage through proceeds from the new FHA loan."

CCCS warned homeowners whose first and second mortgage loans are held by different lenders could find it difficult to qualify for refinancing since only the primary loan qualifies for the FHA program.

Homeowners must meet several requirements to be considered for the program. For example, the 65% of survey participants who meet the threshold criteria are people who indicated they live in the home with the problem mortgage, their mortgage was originated before January 2008, they did not have an existing home-equity line or other second mortgage, they did not own another home and they spend at least 31% of their gross monthly income on mortgage debt.

Nearly 20% of respondents say they do not spend at least 31% of their gross monthly income on their mortgage, a limit required by the FHA refinance program.

Borrowers who qualify for the new FHA program are responsible for paying loan origination fees, as well as an insurance premium to FHA equal to 1.5% of the principal annually. Borrowers need certify there was no misrepresentation in their application for the existing loan.

Also they must agree to share both initial equity and future appreciation with HUD. The equity sharing agreement notes that if the house is sold within the first year, 100% of the initial equity (generally 10% of the value of the property at origination) will go to FHA. If the house is sold one year after, FHA is entitled to 90% of the initial equity, and similarly the percentage keeps dropping 10% each year to 50% after the fifth year, where it stays for the duration of the loan. In addition to the initial equity, when the property is sold, a fixed amount of 50% of any future appreciation of the property must be paid to HUD. The new FHA will be a 30-year fixed-rate loan that may not exceed 90% of the current appraised value of the property. An additional 3% mortgage insurance premium will be financed in the mortgage making the initial loan-to-value 87%. Callers from Greater Atlanta in July and August responded to the survey by e-mail.

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