Ease housing aid restrictions, Senate duo tells FHA

Senator Tim Johnson, Chairman of the Senate Banking Committee, and Senator Elizabeth Warren, both Democrats, have begun to press the Federal Housing Authority (FHA) to change the wording in their new guidelines for loan modifications. They believe that this new wording is preventing many people from being able to take advantage of the FHA loan modification program.

In new guidelines that went into effect on March 15, 2013, the FHA states that those applying for a loan modification must be “currently employed.” While this seems to make sense that the FHA wants to make sure that the person they are granting the loan modification can make the payments, the two Senators have stated that this eliminates the chance for people with other sources of income to benefit from the program.

For instance, a retiree may make their loan payments from their pension or other retirement accounts. A disabled person may make their payments from their Social Security Disability Income, and a single parent might use a portion of their alimony or child support to make their mortgage payments. Other sources of income, such as self-employment are also overlooked under the new guidelines.

The Senators believe by stating that the applicants must be currently employed, people under these financial circumstances cannot qualify for loan modification help. The Senators also stressed in their letter to the FHA that this wording is making their loss mitigation program less successful than it could be, which is something that the FHA must consider when looking at their own financial situation.

A Quick Look At The Federal Housing Authority

While the FHA does not grant mortgages to anyone, they do provide mortgage insurance to low and mid-income individuals so that they can secure a loan. The FHA charges a premium for their insurance, and the premiums have always been used to manage the program.

The FHA has been in existence for almost a century and was first established as a way to help Americans purchase a home without large down payments. In its entire existence, the FHA has always operated within its own budget and has never accepted any money from the federal government.

The FHA has currently increased its insurance premiums and has lengthened the amount of time that a person is required to carry mortgage insurance in an effort to cut their financial losses and improve their ability to offer mortgage insurance in the future.

Since the housing bubble burst, the FHA has seen its coffers dry up as more homes entered into foreclosure than they ever anticipated. At this time, the FHA is anticipating a $16.3 billion shortfall in funds at the end of the fiscal year due to the large amount of bad loans. The FHA may even have to approach the U.S. Treasury for a bail out.

Loss mitigation is one way that the FHA can cut its losses and keep more loans current. The Senators believe that by removing this wording from the FHA guidelines, more loans can remain current and this will ultimately benefit the FHA.