On Tuesday, the Senate Banking Committee approved legislation which it believes will assist beleagured home owners by allowing them to refinance loans that they cannot afford. 

Under the terms of this legislation, the Federal Housing Administration (FHA) would insure the loans of those at risk, provided they meet certain criteria.  In forder to qualify for these new loans, the lenders would have to give a new 30 year fixed rate loan and forgive any amount on the loan that is more than 90% of the current appraised value of the home, leaving the borrower with 10% equity. 

Additionally, the borrower would have to live in the home full time and would have to have a debt to income ratio of no more than 31% or 35%, depending on which legislation passes.  Also, if there is a second mortgage, that lender must agree to cancel that debt or the borrower will not be allowed to obtain a new FHA loan.  Further, borrowers who take advantage of this legislation would have to share their equity with the government at the time they either refinance or sell their home.

Per the terms of this new legislation, Fannie Mae and Freddie Mac (the largest buyers of home loans in the U.S.) must foot the estimated $500 million dollar cost of this deal which is to be paid, in part, by additional fees charged by FHA.

Many questions are still to be answerered.  Can the Senate and the House agree and pass the legislation?  Will the President sign it if they do?  Will lenders be willing to cut the amount they are owed on the loans?  And, perhaps most importantly, if passed, can this legislation help to stabilize the housing market?

For additional information, please the following articles - Mortgage Rescue Advances in Senate, The Risks of Rescuing Borrowers, and Senate Strikes Housing Rescue Deal.