Friday, April 2, 2010

Real Estate Update | Mortgage Principal Forgiveness

Life after April 30, 2010

The clock is ticking for first-time home buyers and move-up/repeat home buyers wishing to take advantage of the generous federal tax credit. April 30th is the drop-dead date to get a binding contract in place with June 30th being the date these deals must be closed by in order to qualify for these incredible tax benefits. As realtors rush to find that home for their buyers to purchase and lenders work to get those deals closed, many wonder what real estate life will be like after April 30, 2010. Will there be another wave of aid to come to the housing market? If so, what will it be?

The Obama Administration continues in its efforts to stabilize the housing market, and there is much talk now of focusing the next round of aid on mortgage principal forgiveness. These efforts are both creative and somewhat controversial at the same time. According to NuWire Investor’s recent article Next Wave of Housing Aid Will Focus On Mortgage Principal Forgiveness, “As the Federal Housing Administration (FHA) prepares to release new plans for addressing the mortgage crisis, industry leaders are concerned that the new program may lack incentives and create additional problems in both the short and long-term. “

HousingWire’s article FHA Mortgage Workout Lacks Incentives and Creates Problems: Industry Sources reported “Under the terms of the voluntary program, lenders will be required to write down at least 10% of the mortgage principal for borrowers who are current on their payments. The program is open to borrowers whose mortgage isn’t currently insured by the FHA. The principal reduction must bring the new FHA loan to value (LTV) to 97.75% and make the new payments account for 31% of the borrowers with second lien mortgages similar to principal reduction and refinance options. The maximum allowed LTV of the combined loans is 115%.”

The article continued adding, as Steve Horne, president of specialty servicer Wingspan Portfolio Advisors said, “principal forgiveness absolutely has a place at the table as a loan resolution strategy and makes more sense than foreclosing at the rate that the industry has been foreclosing, though like many things, the devil is in the details.”

One big issue is what valuation method will be used in determining the LTV of the borrower who is in trouble. Traditional appraisals still appear to be the most accurate gauge in determining a property’s value, but some fear that this valuation method might keep some borrowers from being eligible for the program.

Although a consensus on how to remedy the complex issues of the real estate market will most likely never occur, most will agree that something needs to be done to help correct the economic situation that has stemmed from Wall Street and the mortgage crisis. Only time will tell, but one way or the other, it appears that additional help is on the way.

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