On Thursday June 10, 2010, the Democratic controlled House of Representatives passed the Federal Housing Administration Reform Act of 2010 also known as H.R.5072. The bill mainly helps to replenish the funds FHA uses to insure mortgages against default. It accomplishes this by moving some of the upfront costs to spread them over the life of the mortgage and raising the premium cap by as much as 300%! FHA also estimates is will generate $300,000,000 a month in additional funds, but at a cost of $42 a month more to borrowers.
The most intriguing part of the bill though came at the last minute thanks to Rep. Chris Lee (R-New York). The provision would make borrowers who "strategically default" on their mortgages ineligible for a FHA insured loan in the future! Strategic default has become a huge issue across the nation, but especially in our hard hit Central Valley real estate market. A strategic default is when a home owner just walk away from the mortgage because it now longer makes financial sense, even though they can afford the monthly payment.
Rep. Chris Lee said on the House floor, "If a borrower makes the decision to strategically default on a loan, they certainly should not be allowed to benefit from a government-subsidized program." He also said, "We are not talking about those families who have no choice or who simply can no longer afford their payments, we are talking about the new phenomenon of a person who voluntarily chooses to stop paying their mortgage even though they still have the ability to pay."
The added provision passed in a voice vote of the House without any apposition. The whole bill still needs to pass the Senate though. The one sticky part of this bill would be how will you determine who are the strategic defaulters?
I applaud the idea though and hope it deters people from strategically defaulting, because there are plenty of people who are in REAL need! A short sale to avoid foreclosure is still the best option for most home owners in default.