Mortgage Foreclosure & Refinance Resource

First-time homebuyers, veterans, senior citizens and delinquent mortgage holders may benefit from the newly enacted housing bill. How well it will work may depend on regulators and your bank.

The Housing and Economic Recovery Act, intended to stem home foreclosures and spark sales, offers first-time buyers a tax credit of up to $7,500. It also extends protection to veterans facing foreclosure. As many as 400,000 borrowers on the brink of losing their homes may be eligible for a more affordable loan backed by the Federal Housing Administration.

“The bill, we hope, is the way to rescue some people,” said Democratic Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee and one of the key negotiators behind the legislation. “It’s a way for the FHA to be the alternative lender for people so they don’t have go to subprime lenders anymore.”

Refinancing into the new government-backed program requires your current lender’s approval. If the home’s value is less than the mortgage — which real estate data provider Zillow.com estimates applies to nearly one-third of American borrowers who bought in the last five years — the note’s owner must also agree to reduce the amount owed on the house to 90 percent of its current appraised value.

If you owe $190,000 on a house that’s only worth that much, the bank would have to agree to reduce the loan to $171,000, giving up $19,000 in principal, plus interest.

Answer to Foreclosures

The legislation is Congress’s answer to U.S. foreclosures that may reach 2.5 million this year and next. Defaults among subprime borrowers with weak credit histories have helped flood the market with unsold houses and driven the median price lower for the first time since the Great Depression. Agencies that will implement the legislation are still working to understand it.

“There is every reason for this not to work,” said Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School in Philadelphia and a former assistant HUD secretary under President Bill Clinton. “On every side there are logistic problems.”

Borrowers who wish to refinance into cheaper FHA-backed loans will pay a fee of 3 percent of the loan amount at closing, either in cash or rolled into the mortgage. An additional insurance premium of 1.5 percent a year will be built into the borrower’s monthly payment.

Anyone who obtained a mortgage after Jan. 1 or whose mortgage payment is less than 31 percent of their gross monthly income won’t qualify, according to the FHA Web site. The maximum loan will be $550,440, according to the FHA.

Incentive

For mortgage owners such as JPMorgan Chase & Co. and Bank of America Corp., the incentive lies in trading loans that might otherwise go to foreclosure for a smaller, more likely payoff, said Tom Kelly, spokesman for JPMorgan, which holds about $60 billion in first mortgages.

“The owner of a loan or a package of loans has to say ‘Okay, I would rather have a known dollar amount for this loan and be done with it,’ ” Kelly said. “There is a lot of number crunching involved and a lot of judgment.”

Participating homeowners must also share half of any future property appreciation with the FHA.

Unlike some state and federal programs, borrowers currently behind in their payments will be eligible, said Heather Wong, a spokeswoman for Frank.

Tax Credit

The program takes affect Oct. 1, 2008, and expires Sept. 30, 2011.

The legislation also increases the maximum FHA mortgage amount on other new loans to $625,500 for homes in the nation’s most expensive markets. The limit is tied to an area’s median home price.

Misunderstanding”There is going to be a lot of misunderstanding later on,” Strauss said. “What’s going to happen is that people are not going to pay it back.”

Veterans are also helped by the new law, which lengthens the time a lender must wait to foreclose on a service member’s house from three months to nine. Lenders to military personnel with adjustable-rate mortgages will have to wait an extra year to raise the minimum monthly payments.

Senior citizens interested in reverse mortgages will now find fees capped at a maximum of $6,000. The FHA is also in the process of establishing a new maximum loan limit for reverse mortgages, which allow people 62 and over to tap their home equity through a lump-sum payment, periodic checks, a line of credit, or a combination.