Foreclosure vs. FHA Refinance
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Under a plan proposed by Rep. Barney Frank (D-Mass.), the Federal Housing Administration would encourage lenders to forgive a portion of the debt on troubled loans. If the borrower, because of falling home prices, owes the bank more than the home is worth, the deal could make more sense financially than selling the home at foreclosure. Here's one scenario:
Example
Original home value: $200,000
Loan size: $180,000
Current home value: $150,000
Option 1
Foreclosure
Sale proceeds: $120,000
Foreclosure costs: $30,000
Loss: $90,000,
or 50%
Option 2
FHA refinance under Frank plan
New FHA loan: $135,000
Mortgage insurance and other fees paid to FHA: $15,000
Payoff on original loan: $120,000
Loss: $60,000, or 33%
SOURCES: Lehman Brothers, House Financial Services Committee.
