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September 8, 2010

In a new attempt to help Americans out of the mortgage crisis, the Obama administration is trying to assist homeowners who are "underwater" with their mortgage -- meaning, they owe more on their properties than their homes are worth.

Beginning this week, the Federal Housing Administration will permit lenders to give borrowers who are in this situation refinanced loans backed by the government.

The lenders will be required to forgive at least 10 percent of the original mortgage amount, reports the AP. Investors who have control over the mortgages as part of their large portfolios will select which borrowers are invited to participate.

The lending industry was ill-prepared for a crush of distressed homeowners, the economy worsened and millions of homeowners had taken on so much debt that their financial woes have been nearly impossible to resolve.

Nearly half of the 1.3 million homeowners who have enrolled in the Obama administration's main mortgage-relief program — overseen by the Treasury Department — have already fallen out over the past year. Many borrowers say the government program is a bureaucratic nightmare, with banks often losing their documents and then claiming borrowers did not send back the necessary paperwork. Banks say borrowers often didn't return the required documents.

The new refinancing program takes a different approach. It allows investors in mortgage-backed securities to evaluate their holdings and select borrowers that will be offered refinanced mortgages guaranteed by the FHA. The theory is that there are some loans that investors simply want to unload because they have a high risk of default.

The goal is to stop foreclosure from becoming the go-to solution both for borrowers and lenders.

More homeowners are walking away from their mortgages, even if they can keep up the payments. Known as a "strategic default," some borrowers purposely defaulting on payments when their house values tumble far below the amount they owe.

Simultaneously, when faced with the choice between slashing the amount borrowers owe on their home loans and foreclosing, lenders have generally chosen to foreclose on borrowers. Many experts doubt the new program will persuade investors to change their minds.

The program is funded with $14 billion from the Obama administration's existing $75 billion mortgage assistance program. That money will be used to cover incentive payments to lenders and losses from borrowers who fall back into foreclosure.

To qualify, borrowers must be up-to-date on their mortgages, though many people who have already received loan modifications through other programs are still eligible. The plan is limited to loans in which homeowners owe at least 15 percent more than their home's current value.

If you are underwater on your mortgage you have options besides defaulting. Read these tips from WiseBread.com to learn more.

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