About Government Refinance and Home Purchase Programs

Bob Ivry recently wrote the following for Bloomberg:

Sept. 19 (Bloomberg) — As many as half of the 450,000 subprime borrowers whose mortgage payments increase in the next three months may lose their homes because they can’t sell, refinance or qualify for help from the U.S. government.

“Short of the cavalry riding in over the hill, a lot of these people are just stuck,” said Christopher Cagan, director of research and analytics at Santa Ana, California-based First American CoreLogic, the risk management unit of the biggest U.S. title insurer.

The number of borrowers whose mortgage payments jump in the next three months will be the second-highest ever for a quarter, according to Credit Suisse Group, Switzerland’s second-biggest bank. Twenty-seven percent have already missed a payment, said First American LoanPerformance, which owns the largest database of U.S. mortgages. That makes them ineligible for the Federal Housing Administration bailout proposed last month by President George W. Bush.

The following is an excerpt from the transcript of recent comments made by Fed Chairman Ben S. Bernanke before the Committee on Financial Services, U.S. House of Representatives. The entire transcript can be found here.

Beyond the actions underway at the regulatory agencies, I am aware that the Congress is considering statutory changes to help alleviate the problem of foreclosures. Modernizing the programs administered by the Federal Housing Administration (FHA) is one promising direction. The FHA has considerable experience in providing home financing for low- and moderate-income borrowers. It insures mortgages made to borrowers who meet certain underwriting criteria and who pay premiums into a reserve fund that is designated to cover the costs in the event of default. This insurance makes the loans less risky for lenders and investors, and it makes the loans eligible for securitization through the Government National Mortgage Association (Ginnie Mae).

Historically, the FHA has played an important role in the mortgage market, particularly for first-time home buyers. However, the FHA’s share of first-lien home purchase loans declined substantially, from about 16 percent in 2000 to about 5 percent in 2006, as borrowers who might have sought FHA backing instead were attracted to nontraditional products with more-flexible and quicker underwriting and processing. In addition, maximum loan values that the FHA will insure have failed to keep pace with rising home values in many areas of the country.

In modernizing FHA programs, Congress might wish to be guided by design principles that allow flexibility and risk-based pricing. To alleviate foreclosures, the FHA could be encouraged to collaborate with the private sector to expedite the refinancing of creditworthy subprime borrowers facing large resets. Other changes could allow the agency more flexibility to design new products that improve affordability through features such as variable maturities or shared appreciation. In addition, creating risk-based FHA insurance premiums that match insurance premiums with borrowers’ credit profiles would give more households access to refinancing options.

More updates on the new legislation aimed at helping Americans obtain Morgage relief from David Lightman of the Hartford Courant:

WASHINGTON – Both houses of Congress sent strong signals this week that help is on the way to lower- and middle-income homeowners, both current and prospective, as members took steps to refashion the Federal Housing Administration as a stronger, more consumer-sensitive agency.

The Senate Banking Committee, by a 20-1 vote Wednesday, agreed to lower the minimum down payment on FHA-backed loans and raise the loan amounts. On Tuesday, the House took similar action and endorsed even bigger loan limits by an overwhelming margin.

Both bills have much in common, notably their chief goal: To ease the subprime mortgage crisis and make the FHA, the New Deal agency that once helped so many lower- and middle-class homeowners for so long, a major player again.

The two houses have some disagreements, and unless those can be reconciled, the help may have to wait. But key players and experts were optimistic.

David Lightman, the Washington Bureau Chief for the Hartford Courant recently wrote this regarding the FHA Modernization Act of 2007:

WASHINGTON – The Senate Banking Committee today agreed on compromise legislation that will make it easier for consumers to get Federal Housing Administration-backed loans.

The “FHA Modernization Act of 2007,” considered one of Washington’s most important efforts to ease the subprime mortgage crisis, won easy approval and is headed to the Senate floor.

“We need to make sure that credit is available, including for subprime borrowers, on fair terms so that the people of this country have an opportunity to build wealth for the future,” Committee Chairman Christopher J. Dodd, D-Conn., told his colleagues.

Kathy M. Kristof, a Los Angeles Times Staff Writer recently wrote the following:

The Federal Housing Administration is coming to the rescue of at least some of the homeowners in peril across the country. The FHA, which has long helped low-income and credit-scarred borrowers get financing, has launched FHA Secure in an effort to stem the tide of foreclosures caused by the sub-prime mortgage crisis.

How will FHA Secure work and who might it help? Here are some answers.

What is FHA Secure?

It’s a new loan program aimed at helping borrowers refinance their adjustable-rate mortgages — even if they are currently in default. The Bush administration believes that some sub-prime borrowers didn’t understand the terms of their loans and have fallen or will fall into repayment trouble when their adjustable interest rates reset at higher levels.

FHA Secure loans will be made by private lenders at market interest rates and simply be insured by the FHA. What will be different is that underwriting standards will be loosened, allowing more borrowers to qualify. The FHA insurance premiums — usually the same for all loans — will be based on risk, declining for those with more equity and better credit.

From MarketWatch:

WASHINGTON (MarketWatch) — The White House is proposing to expand the role of the federal government to stem a wave of morgage defaults, President Bush said Friday, unveiling a series of steps including allowing refinancing into government-insured mortgages.

Under the plan, the Federal Housing Administration’s mortgage insurance program will be changed to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages.
People who have missed mortgage payments are now ineligible for FHA insurance.

The president’s plan would allow them to be eligible for FHA insurance if the amount they are required to pay each month increases, as has happened on many adjustable loans with so-called “teaser” introductory rates.
However, Bush is rejecting a wholesale bailout of borrowers and lenders alike, saying it’s not Washington’s role to provide such a backstop.

“The government’s got a role to play,” Bush said at the White House. “But it is limited.”

David Bach over at Yahoo! Finance recently wrote this about the recent White House announcements concerning the U.S. government’s plan to assist American homeowners with the FHA loan program:

On Aug. 31, while many of us were getting ready for a long holiday weekend, President Bush addressed the nation about the mounting concerns in the housing market. His speech took place exactly one month before we’ll see a record-breaking $50 billion in mortgages reset to a new rate.

That’s right, in the month of October alone, many homeowners will be forced to pay higher monthly mortgage payments than they can reasonably afford. And while this number is staggering, it’s not exactly new information — it’s been known for two years that the crisis was coming.

The Associated Press reports that, in all, 2 million homeowners have adjustable rate mortgages scheduled to reset by the end of 2008. Of those, the Federal Housing Administration (FHA) estimates that 500,000 could experience foreclosure.

Is Bush’s Proposal Enough?…