The Federal Housing Administration’s loan loss-mitigation program has helped 36,000 families with FHA-backed loans avoid foreclosure since October, HUD Secretary Alphonso Jackson said in urging Congress to pass a modernization bill.

In a press release, Jackson asked Congress to pass legislation updating the FHA’s mortgage programs so they are available to more Americans.

The modernization bill would increase loan limits in high-cost real estate markets, such as California, where fewer than 300 families have been able to take advantage of FHA loan relief measures this year, Jackson said in a version of the release sent to news media in California.

“Too many families have been lured into accepting high-cost, exotic loans to purchase their homes because the market doesn’t provide enough choices that are safe, fair and affordable,” Jackson said. “Modernizing the FHA would provide more hard-working families with a strong alternative to risky mortgages.”

FHA’s Loss Mitigation program gives lenders the ability to offer borrowers a number of HUD-approved options for avoiding foreclosure, including:

  • Special Forbearance: This option can include a temporary reduction or suspension of a mortgage payment until the borrower can re-establish financial stability, or a permanent revision in the payment amount to reflect a borrower’s new and reduced financial status.

  • Modifications: The lender can rewrite the mortgage note in order to roll delinquent amounts into the principal or extend the term of the loan to reduce monthly payments.

  • Partial Claim: FHA’s insurance fund makes a one-time payment to bring the mortgage current, which becomes an interest-free subordinate mortgage due when the insurance is terminated.

  • Pre-Foreclosure Sale: The borrower avoids foreclosure by selling the property for its appraised value even if the proceeds are not enough to pay off the mortgage.

  • Deed-in-Lieu of Foreclosure: This option is a negotiated settlement where the borrower deeds the house back to the lender, saving the borrower all of the credit ramifications of a foreclosure while also saving the government some legal costs.

The modernization bill, which stalled in the Senate last year, would also eliminate the current 3 percent down-payment requirement and offer more flexible options. FHA would be permitted to offer more affordable rates to borrowers with impaired credit but with enough funds for a down payment.

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