mortgage foreclosure help

Mortgage in trouble? How Congress wants to help

Should Uncle Sam insure mortgages? That’s the big debate. But the devil is in the details and nobody is talking about them. Here’s how the plan would work.

Politicians in Washington are busy arguing about the financial and moral hazards of coming to the aid of troubled homeowners.

But overshadowed by the debate over a proposal to let the government back risky mortgages is one important issue – how the program would actually work.

Who would qualify? What do borrowers and lenders have to sacrifice? How does the government get paid for its trouble?

The House last week passed a bill by Rep. Barney Frank, D-Mass., that would allow the Federal Housing Administration to insure new mortgages for people at risk of foreclosure. A key Senate committee is likely to take up a similar proposal this week. Final legislation could differ, but the House bill offers a sense of how the program could work if enacted into law.

What follows is an initial explanation based on the legislation and interviews with government and private-sector players. It uses a fairly probable scenario in a time of falling home prices – a borrower who is “underwater” and owes $220,000 on a home that is now appraised at only $200,000.

First steps: Who qualifies

For homeowners to qualify under Frank’s proposal, they must be full-time occupants of their principal residence. They also must have a mortgage debt-to-income ratio on their existing loan of more than 35%. So if the borrower above who owes $220,000 makes $4,000 a month, his monthly mortgage debt must exceed $1,400 to be considered for the program.

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