Victims of Hurricane Katrina willing to rehabilitate damaged homes will be able to get an advance equal to 12 months of principal, interest, taxes and insurance under the just-announced FHA Mortgage Assistance Initiative.

In a letter to lenders, the Federal Housing Administration says that under the new program those with FHA loans who are willing to rehabilitate homes in areas hit by hurricanes Katrina, Rita and Wilma can essentially postpone mortgage payments for as long as a year as they re-build the property. The insured advance from lenders need not be repaid until the home is sold, perhaps years into the future.

The program will jump-start residential re-building by making damaged homes that are now financed with FHA-insured loans more attractive to repair. There are likely tens of thousands of homes that can qualify for the program in disaster areas within the states of Alabama, Florida, Louisiana, Mississippi and Texas.

The program addresses part of the very complex issue of who will pay for the massive re-building required in the impacted states. If homes are not re-built, the FHA could face huge claims from lenders who foreclose on properties damaged by the hurricanes. In the foreclosure process it's likely that the lenders would bear enormous losses while owners would lose homes and many would face bankruptcy.

The FHA program extends only to principal residences where it has insured home loans and where the properties are "habitable or can be made habitable."

It will likely take years and in some cases decades to recover the funds advanced under the initiative. However, repayment over the long-term is a far better alternative than the absolute losses which would result from massive numbers of foreclosures.

In general terms, the program works like this:

The lender contacts a borrower in the disaster area and determines that "the borrower wants to return and rebuild, and that property hazard insurance or other funds will be available for the re-construction."

Under the FHA loan program, borrowers who live in flood plains are required to have flood insurance.

The borrower, in turn, "is living in rental housing and cannot make mortgage payments; repairs or re-construction may not start for a number of months, and the borrower may not be able to return to their affected property until some time next summer."

There must be good reason for the lender to believe, says FHA, "that the borrower could return to the property and begin making mortgage payments by September 2006."

Assuming that this borrower missed their first mortgage payment in September 2005, the FHA letter to lenders says borrowers will then "be eligible for the FHA Mortgage Assistance Initiative after December 2, 2005, when four payments are due and unpaid. If, by the end of December 2005, the lender and borrower have completed the process, then the mortgagee should apply to HUD for a FHA Mortgage Assistance Initiative equal to 12 months of principal, interest, property taxes and property insurance."

In addition, the FHA announced that it has extended its foreclosure moratorium in hurricane areas until February 28, 2006. Originally, there had been a three-month moratorium that ended in November.

For specifics, FHA borrowers in impacted areas should contact lenders as soon as possible. Refer to "Mortgagee Letter 2005-46."

For more articles by Peter G. Miller, please press here.

Published: December 2, 2005

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