Real Estate

Refi rescue

And potentially some tax help, too. Here are breaks that borrowers in a pickle may receive in the next few months.

By Jeanne Sahadi, senior writer

NEW YORK ( -- Hundreds of thousands of homeowners who may struggle to make mortgage payments are likely to get some relief in coming months, including more options to refinance into lower-cost, fixed-rate loans and tax relief if they do face foreclosure.

About 240,000 borrowers of the estimated 2 million with adjustable-rate loans scheduled to reset in the next year already are eligible to refinance into a loan insured by the Federal Housing Administration (FHA) - roughly 80,000 of them are eligible because of the newly created FHASecure Act, which loosens FHA's criteria for refinancing.

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And more changes are likely, with the possibility of helping tens of thousands more.

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The FHA program has been geared toward home buyers and homeowners with weak credit. Lenders may be more willing to lend to a buyer with shaky credit when the FHA is insuring the loan.

Borrowers with FHA-insured loans - which they get from private lenders as they would any other mortgage - pay a small premium to the FHA every month. The FHA, in turn, uses those premiums to cover the lender in the event of foreclosure and requires lenders to pursue viable ways to help borrowers avoid foreclosure if they become delinquent.

If you are behind on payments by at least four months but no more than 12, the FHA may even make a one-time interest-free loan to you to make your account current with your lender.

It used to be you couldn't refinance into an FHA loan if you'd been delinquent in your payments for any reason. But with the FHASecure Act, delinquent homeowners qualify for an FHA-insured refi if they have:

  • A history of on-time payments for at least six months before their loans reset to higher rates
  • Interest rates scheduled to reset between June 2005 and December 2009
  • 3 percent equity in their home, or the cash equivalent
  • A sustained history of employment
  • Sufficient income to make their FHA-insured mortgage payment and all other obligations

The FHA will still insist that lenders verify borrowers' income and ensure that their total debt payments don't exceed 43 percent of their income or that their mortgage payment won't exceed 31 percent of income. If those ratios are exceeded, the lender must explain how the homeowner can compensate for that.

For borrowers who qualify, an FHA refi can save them money. Even with the premiums FHA charges, an FHA-insured loan could save a borrower $100 or more a month for every $100,000 borrowed compared to the payments they'd owe under an adjustable-rate mortgage that readjusts upward by 3 percentage points.

And if the homeowner has an FHA-insured loan for five years and has built up 22 percent equity in the home, the borrower no longer needs to pay the premium.

FHA requirements may get even more liberal

Lawmakers also are considering legislation to modernize FHA guidelines, which could make FHA refis available to another 60,000 troubled mortgage borrowers, and open the door to another 140,000 new home buyers who today wouldn't qualify for an FHA-insured loan, according to FHA estimates.

Jaret Seiberg, a financial services analyst at policy research firm Stanford Group, expects lawmakers will pass the FHA legislation, noting that it has broad support in both parties. "FHA reform is the lowest hanging fruit. It's the easiest thing to do."

That legislation would further liberalize FHA loan requirements. Among its key provisions, it would:

Raise loan limits. Today the FHA won't insure loans above $362,790 for single-family homes, and even less in lower-cost areas. Under the bill before the House, which is expected to vote next week, that ceiling would increase to 100 percent of the conforming loan limit for mortgages backed by Fannie Mae and Freddie Mac, currently $417,000.

But Barney Frank, chairman of the House Financial Services Committee, plans to propose an amendment that would boost that new limit to $500,000, and give the FHA commissioner discretion to raise that limit further during mortgage crises.

Reduce down payment requirements. Homeowners would no longer be required to have 3 percent equity or the cash equivalent. They could get an FHA-insured loan with 0 percent down.

Reduce complexity. Reform also would "clear away a bunch of burdensome rules that make FHA difficult to use," Seiberg said.

Foreclosed borrowers may get tax break

For homeowners whose situations can't be remedied with a refi, they may get tax relief if they end up facing foreclosure.

Currently, if you foreclose on your home and the bank forgives a portion of your mortgage debt which isn't recovered by the sale of your home, that forgiven debt is treated as taxable income to you. President Bush has asked lawmakers to provide a temporary exemption from that rule.

Both Seiberg and Clint Stretch, managing principal of tax policy at Deloitte Tax LLP, think it's likely lawmakers will pass that exemption this fall and make it retroactive so that homeowners who foreclosed in 2007 would be covered.

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