I've been hearing rumors of this plan for a while.  A similar bill passed the House of Representatives in May, and was expected to get to the Senate fairly quickly.  I guess 7 weeks is fairly quick in Washington.

What is it?

We've seen a number of plans recently to help homeowners get out of trouble with problem mortgages, but so far they have met with limited success.  The first such program was the FHA Secure mortgage, which allowed homeowners who had gotten into credit difficulties because of adjustable rate mortgages to refinance.  While this program was originally expected to help as many as 240,000 homeowners, to date only about 2000 have been able to use it. 

Later, the President assembled a group of lenders into a group called the Hope Now Alliance.  While this group appeared promising initially, it has been difficult to see the tangible benefits of this to date.

The new program appears to have the potential to be more far-reaching.  Under the plan being considered by the Senate, homeowners would be eligible for FHA insurance for their home loans so long as the lenders agreed to concessions.  Here's how it might look:

Suppose a homeowner owes $250,000 on her home, but a fair-market appraisal indicates that the home is worth only $200,000.  Under the new program, if the holder of that $250,000 mortgage agreed to accept approximately $180,000, the FHA would be able to insure the new mortgage.  The homeowner would not have any immediate cash liability for the remaining balance, rather, she would have to repay a portion of that benefit in the future if there were any profits on the sale of the home. 

I see this program as a significant step forward, as it addresses a critical issue: the number of homeowners who are upside down - that is, they owe more than their homes are worth.  This group has had its options severely limited, and has often had little choice but to explore a short sale, or to let the home go.  The possibility of a short refinance option appears quite hopeful.