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Frank fix: FHA to the rescue
Frank fix: FHA to the rescue
In brief: Under House Financial Services Committee Chairman Barney Frank's plan, lenders would take a hit by reducing loan balances to 85% of newly appraised home values. The government would then refinance mortgages into FHA-insured loans and give borrowers new mortgages at 90% of new appraised values. That would immediately give homeowners 10% equity stakes -- and that should encourage them to keep up loan payments since they would have something to lose in foreclosure. The government would take the difference between the 85% and 90% of new appraised values, 5%, as compensation for taking on the extra risk. Borrowers would also be required to pay an annual insurance premium equal to about 1.5% of the loan value.

Lenders would have to opt into this plan, and the loans issued under it would only be available to borrowers whose mortgage debt exceeds 40% of their income. That would ensure that those who could afford to keep paying off their original mortgages would not deliberately fall behind on payments in order to qualify for the program.

The argument: It would rescue many homeowners from foreclosure by taking them out of high-interest rate loans and putting them into affordable fixed-rate ones. Lenders would benefit by getting most of their investments back.

If home prices go up, the government would pocket the increased value. The government would hold a "negative equity certificate." The certificate is a lien, based on the reduction of the original mortgage balances, that would have to be repaid when the home is sold or refinanced.

Who supports it: The idea is backed by both advocacy groups on the left and right. And bankers have indicated the proposed plan would be useful, according to Jaret Seiberg, an analyst with Stanford Group.

Who's against it:The plan has attracted little opposition. Seiberg said he believes it will "form the backbone" for the legislation that is eventually enacted.

Taxpayer price tag: Unknown. It could pay for itself, but if mortgage defaults skyrocket, the FHA could be paying off claims on many loans.

NEXT: Dodd's Hope for Homeowners plan
Last updated April 01 2008: 6:13 PM ET

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