The mortgage industry should hold off on foreclosures until a new law goes into effect Oct. 1, said House Financial Services Committee Chairman Barney Frank (D-MA) and Housing and Community Opportunity Subcommittee Chairwoman Maxine Waters (D-CA).

Frank and Waters said the new law, designed to refinance in-trouble borrowers,  will allow qualified applicants to refinance into FHA- insured mortgages and avoid foreclosures.

The new legislation is expected to be signed by President Bush soon. Reps. Frank and Waters are urging the mortgage industry to work with borrowers who can take advantage of the new refinancing program. Chairman Frank will hold a hearing in September to monitor the progress of loan modification by mortgage servicers.

 "I would hope that no one would be foreclosed upon between now and October 1st who would have qualified for this program had the effective date been immediate," Frank said. "And that is within your power to do. You can show some forbearance. October 1st is coming, begin the planning, begin the talking with people, but I think it would be a shame, an embarrassment to all of us if people were to lose their homes and the neighborhood deterioration were to be advanced and the economy would suffer."

In order to qualify for FHA refinancing under this program, borrowers would have to have more than 31 percent of their monthly income dedicated toward their mortgage payment as of March 1, 2008, and live in their only home.

Borrowers would have to meet the specific qualifications of the FHA program, and would have to agree to share future home appreciation with the government. Lenders would also have to agree to significant reductions in the amount owed to them. The Congressional Budget Office estimates that at least 400,000 families will avoid foreclosure at no cost to the taxpayer.

Specifically, the Hope for Homeowners Act:

… Expands the FHA program so many borrowers in danger of losing their home can refinance into lower-cost government-insured mortgages they can afford to repay.

… Protects taxpayers by requiring lenders and homeowners to take responsibility. Lenders and mortgage investors must take significant losses by reducing the loan principal. In exchange for an FHA guarantee on the mortgage, borrowers must share any profit from the resale of a refinanced home with the government.

… Contains critical protections for taxpayers' dollars, including higher refinancing fees that establish a new FHA reserve to cover possible losses from defaults on these government-backed mortgages.

… Covers only primary residences: No speculators, investment properties, second or third homes will be refinanced.

… Will be financed by money from the Affordable Housing Trust Fund.

… Provides $180 million for financial counseling and legal assistance to help families stay in their homes.

In addition, Frank called for restructuring the mortgage servicing industry if servicers fail to cooperate in aggressively forbearing and preventing foreclosures.

"One of the things we have been told," he said, "is 'look there is this problem because the people who service the loans are not the people who own the loans.'"