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Has FHA Helped Much?

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Posted On: 12/31/2008

Q: How many homeowners facing foreclosure have been directly helped with FHA loans guaranteed by the federal government?

A: Given the enormity of the problem you might think that huge numbers of homeowners have been able to refinance toxic loans. The actual FHA numbers are small.

The FHASecure program was initially announced as a federal effort that would offer borrowers with toxic loans “an option to refinance their existing mortgage so they can make their payments and keep their homes.” In fact, as of Oct. 1, only 3,794 delinquent conventional borrowers were able to refinance with FHA loans. In contrast, more than 450,000 borrowers who were not delinquent – and thus not facing foreclosure – were able to refinance with mortgages insured by the FHA.

During the summer the “Hope for Homeowners” loan program was created under the FHA reform bill passed by the Congress. This is a program that requires substantial concessions by lenders before borrowers can refinance. As of Oct. 15, HUD reports that it received 42 Hope for Homeowner loan applications – and approved none. This figure is misleading in the sense that the Hope for Homeowners program was just starting and better numbers should be expected in the future.

Q: I have an interest-only home-equity loan. It adjusts every time when the prime rate adjusts. I have had it for about three years and the total debt is around $29,000. At one point the rate was as high as 8 percent, but now it is about 5 percent. I have the cash in the bank in a CD at 3.75 percent. Should I pay off the loan or should I take a fixed-rate home-equity loan at about 6.75 percent for 15 years. Or should I just try to put the extra money on this loan and hope the rate does not go up again. What should I do?

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A: No one knows what will happen to interest rates in the future, and without such information any answer to your question must rely on guesses, dart boards and personal preferences.

That said, in a world with a “liquidity crisis” there's a huge benefit to having cash on hand as lenders cut back credit lines even for those with good credit. In your situation you can always cash out the CD and pay off the home equity line of credit (HELOC) if that's what you want to do.

To me the real question is a little different. Is the monthly payment a burden? If not, then take three steps: First, make all payments in full and on time to lower the balance and avoid late charges and credit dings. Second, stop borrowing against the line of credit. Third, make prepayments because with an interest-only loan you're not reducing the debt with minimum payments.

Some will argue that prepaying debt is a “bad” investment that instead you should invest in stocks or bonds with a higher rate of return. Right. Just look at Wall Street during the past year ... The reality is that you must repay the HEL while investments elsewhere can represent substantially more risk than simple prepayments.

As a country we need to go back to some old-fashioned notions, such as less debt and more savings. I know, I know, this sounds dull and boring – but then does anyone really enjoy the “excitement” of foreclosure and bankruptcy?

Q: What happens to my mortgage if the lender goes bankrupt before closing?

A: Your need is to close on the home. It may well be that the seller needs you to settle at the negotiated time to purchase a replacement property. And the party selling to your seller may have the same need and so on and so on. If you don't go to closing the seller may well have grounds to keep the deposit.

There are several alternatives. First, speak with your lender. If your “lender” is actually a mortgage broker he or she may be able to quickly go to another investor for financing if that's necessary.

Second, if you must get a replacement lender then you may need to ask the seller to delay closing. Given that the owner's goal is to sell the property a delay might be far-more preferable than a lost sale, especially in markets where home values are falling.

Third, real-estate agreements usually have a financing contingency. If the contingency has not been withdrawn – and has been properly written from the buyer's perspective – you may now have an option to withdraw from the transaction without penalty. Speak with a real-estate attorney before taking any action.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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