Government Refinance Assistance

Kenneth Harney, a columnist over at the Washington Post, put up this interesting piece recently:

The term “mortgage meltdown” has become so common — on TV, in headlines and in casual conversations — that you might assume that this is a tough time to get a mortgage.

But the reality is starkly different: Mortgage money is plentiful; the majority of mortgage products remain relatively unaffected by troubles in the subprime segment; and interest rates for 30-year, fixed-rate loans remain in the low 6 percent range for people with reasonably good — not necessarily perfect — credit records.

Even interest rates on jumbo loans — those for more than $417,000 — have fallen after spiking this summer.

The main change over the past several months is that “the products and underwriting that allowed people to buy houses they couldn’t afford have disappeared,” said Ted Grose, president of 1st Mortgage Advisors in Los Angeles.

Nonetheless, lenders and brokers say, there is a widespread and persistent belief by consumers that the entire mortgage market is in crisis.

Kit Crowne, a loan officer with Right Trac Financial Group in Manchester, Conn., said even sophisticated homeowners with high incomes are under this impression. He recently handled a relocation financing for a professional couple moving from New Jersey to Connecticut. During the initial discussion, according to Crowne, one spouse said: “I’m really not sure that we’re going to be able to even qualify for a mortgage. We’ve got a lot of graduate and dental school loan debt — and I hear it’s a terrible time in the mortgage market.”

Crowne checked the couple’s credit and verified assets and put them into a cream-puff fixed-rate first mortgage at 6.25 percent for 30 years. “You’d be amazed,” he said, “at how often we run into this” pessimism — even though rates are lower than they were midsummer.

Jumbo mortgages, which always have carried higher rates than “conforming” loans, or loans eligible for purchase by Fannie Mae and Freddie Mac, have recently been in the low 7 percent range, according to Crowne, down from 8 percent and higher a couple of

In Everett, Wash., Jim Brown, chief executive of Veteran Mortgage, agreed that “the ‘mortgage meltdown’ idea is way overstated.” Even in his part of the country, where home prices are rising, “a lot of people think that the mortgage market is in much worse shape” than it actually is.

“Other than subprime and high-LTV [loan-to-value ratio] stated-income” programs, he said, “we’ve got pretty much everything now that we did before. We’ve got a lot of outlets.” For example, Brown’s company offers buyers with limited resources five loan programs that allow zero down payments and fixed rates of 6 percent to 6.25 percent.

Most lenders and investors are quick to note that, while mortgage money is plentiful, underwriting standards are more strict than they were a year ago. Jumbo loans, for example, often require two appraisals — one by an appraiser selected by the lender and the other by one working for the investor.

“And they better line up,” Crowne said, or they won’t do the deal.

Similarly, FICO credit-score standards generally are higher than a year ago, stated-income mortgages with no verifications are hard to find and major investors are on the prowl for anything hinting at fraud. Lenders and investors are especially wary of excessive “layering of risk” — combining low down payments with marginal credit scores and high debt-to-income ratios — in markets where prices are trending lower.

A major legislative development underway on Capitol Hill could expand consumers’ range of mortgage choices even further: Congress appears to be on the verge of transforming the once-stodgy Federal Housing Administration program into a competitive home loan option nationwide, with lower minimum down payments and maximum mortgage amounts generous enough to fund loans in pricey California.

Under a bill passed by the House on Sept. 18, FHA loans could go as high as 125 percent of an area’s median home price or 175 percent of the limit for loans purchased by Fannie Mae and Freddie Mac. In California, where the statewide median price is in the mid-$500,000s, that could mean FHA-insured mortgages above $600,000. A companion bill approved by the Senate Banking Committee would cap FHA loans at the Fannie Mae-Freddie Mac limit, currently $417,000.

A key strength of the FHA that many borrowers may not know about is that its funding base is practically bulletproof: Its mortgages are pooled into federally guaranteed bonds issued by the Government National Mortgage Association (Ginnie Mae) and are considered nearly as safe as Treasury securities.

Better yet, FHA loans are consumer-friendly — no prepayment penalties, flexible and generous for consumers with past credit challenges — but old-fashioned and strict about documenting income and assets.

Jim Buchta over at the Star Tribune in Minnesota recently wrote an interesting article on FHA loans and buying foreclosed houses:

A low-cost Federal Housing Administration mortgage and a bargain-priced foreclosure in St. Paul seemed like the perfect combination for first-time buyer Damon Kelly, but an FHA rule aimed at preventing property flipping nearly derailed the sale.

That rule says that the FHA will not approve a mortgage on a property if titled ownership of that property has changed within 90 days prior to the signing of the purchase agreement.

Confusion about the true ownership of the house raised questions about whether Kelly’s house met those requirements and, just a couple of days before closing, Kelly was forced to extend the lease on his apartment an extra month.

“It was quite confusing,” he said. “And extending our rent out another month didn’t help our pocketbooks.”

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Matthew Mogul, Associate Editor at The Kiplinger Letter recently put up this excellent analysis of the current mortgage climate and the things the government can or can’t do:

Expect only limited help from the government as the subprime mortgage mess continues to take a heavy toll. Foreclosures are approaching record levels, and we expect more than 2 million families to lose their homes over the course of this year and the next as interest rates on adjustable rate mortgages reset higher and push the monthly payments out of reach.

That’s not to say regulators and government agencies won’t try. Though no big bailouts are on the way — for either homeowners or lenders holding troubled mortgage loans — government officials in Washington and at the state and local levels are pushing initiatives that will help stanch some of the bleeding.

“I haven’t seen one broad program that would put an end to this,” says Rick Sharga, vice president of marketing for RealtyTrac, a California-based group that tracks foreclosures. “What is heartening is there are a number of small programs that will help some people keep their homes. I think you’re going to see these small scale activities that will have an impact.”

State governments are doing the most, especially those that have been hit hardest. About 70% of all foreclosures are concentrated in seven states: Arizona, California, Florida, Georgia, Michigan, Ohio and Texas. In some locations, the troubles are tied to plant closures and layoffs, while in others, the culprit is speculative buying.

Aid is taking several forms: Many states are setting up hotlines that offer advice and even help homeowners bargain with lenders or assist with refinancing. Ohio has gone so far as to sell $500 million in bonds to establish a fund to help low-income homeowners refinance their mortgages, while state programs elsewhere offer loans to cover refinancing fees. Massachusetts will postpone foreclosures for up to 90 days to buy time for homeowners to try to work out problems.

Federal regulators and policymakers are also jumping in. The recent Federal Reserve move to cut interest rates is an example of this. The lower rates will help some homeowners with adjustable loans by limiting the hike in monthly payments they face.

Federal regulators also gave mortgage giants Fannie Mae and Freddie Mac permission to expand their investment portfolios by 2%. That frees them up to hold more mortgages, making it easier for banks and other home loan originators to resell their mortgages on the secondary market. Fannie and Freddie want more, insisting they need a 10% portfolio increase to help stressed homeowners, but that seems unlikely for now.

New banking guidelines issued by Washington should also help a little. They urge lenders to be more flexible and more proactive in spotting trouble early. In some instances they’ll recommend that homeowners seek nonprofit debt counseling, while in more dire cases lenders are encouraged to waive penalties or reduce prepayment fees that block refinancing.

Congress, meanwhile, is moving to thwart future problems. Legislation to modernize the Federal Housing Administration, cutting red tape and letting the agency handle more refinancings, will pass this year. The law will increase the size of mortgages the FHA can insure from $362,000 to $417,000. It’ll also lower down payments from 3% to 1.5% — and in some cases to zero.

A crackdown on predatory lending is also assured, with new regulations and legislation to increase disclosures and tighten subprime requirements. Expect extra legal protections for more subprime borrowers. There will also be bans on mortgages to consumers who don’t earn enough money to make monthly payments after low teaser rates have expired, as well as limits on prepayment penalties and low-documentation mortgages.

What should beleaguered homeowners do? Seek assistance early. Most loan officers will try to work something out to avoid foreclosure. It’s in their best interests to do so: A foreclosure will cost anywhere from 20% to 40% of the value of the mortgage, meaning it’s better for the lender to offer a struggling homeowner a loan modification. Lenders and mortgage servicers — those handling payments — have leeway even if loans were bundled up and sold off to big investors.

John Toscano at the Queens Gazette recently wrote this summary of the recent legislation changes regarding goverment refinance assistance:

Recently enacted legislation intended to remedy the present home ownership crisis in the United States will help struggling homeowners to refinance their mortgages to more affordable government-backed loans which will help them to remain in their homes, Congressmember Carolyn Maloney declared last week.

Maloney, chair of the Financial Institutions and Consumer Credit Subcommittee, addressed the present effort to help homeowners following House passage of the bill entitled, “Expanding American Homeownership Act of 2007″, which was approved by a 348-72 vote.

“Affordable housing is crucial to strong families, strong communities and a strong economy,” Maloney declared. “Unfortunately, an alarming increase in foreclosures and the collapse of the subprime mortgage market have spawned a homeownership crisis in our country. Millions of American families are currently at risk of losing their homes and many more have been priced out of the market.”

The mortgage crisis led to the recent action by the Federal Reserve to lower interest rates for banks. It is hoped the move will make it easier for many homeowners to borrow money.

Maloney said that although the new legislation, reforming certain Federal Housing Administration (FHA) powers that are critical to helping homeowners avoid foreclosure will be very helpful, “We must address the underlying mortgage maker problems that spawned the subprime crisis in the first place,” Maloney said.

Maloney added that the FHA reform bill seeks to modernize the housing agency by providing a reliable source of affordable mortgage loans for first-time homebuyers. She said that in recent years, FHA mortgage insurance has been overtaken by the more flexible lending practices of private lenders.

But, she said, the new legislation, which must still be passed by the Senate, would enable the FHA to serve more subprime borrowers at affordable rates and terms and attract borrowers who have turned to “predatory” loans in recent years. The legislation would also offer refinancing to homeowners struggling to meet their mortgage payments in the midst of the turbulent mortgage markets.

Maloney authored a provision in the approved expansion measure that would help to increase the number of home-based child care centers across the country. She said the amendment would increase the traditional cap on single family home mortgages administered through the FHA by 25 percent. This would help people to purchase larger homes to house a licensed child care facility. Mortgage applicants would need to present a valid childcare license in order to qualify for the loan increase, she said.

Here is a Reuters story (via the LA Times) on the bill going through the House of Representatives to help provide mortgage relief to US homeowners:

WASHINGTON — – The U.S. House of Representatives voted Tuesday to overhaul the Federal Housing Administration and allow the mortgage insurance program to help more homeowners in danger of losing their homes.

The FHA, set up in 1934 during the Depression, was designed to help first-time home buyers win favorable loan terms by guaranteeing mortgage payments to lenders.

The new legislation would broaden underwriting standards so that current homeowners could refinance before they lose their homes.

Lawmakers passed it by a vote of 348 to 72. The Senate Banking Committee is due to vote today on its version of the legislation.

If the full Senate passes the bill, lawmakers from both chambers will meet to draft compromise language for consideration by President Bush.

Although the Bush administration has spoken in favor of overhauling the FHA, it has opposed some calls to raise the value of loans that can be insured by the program.

Fannie Mae and Freddie Mac, two major government-sponsored mortgage funders, can invest in loans of $417,000 or less. The Bush administration supports raising the FHA loan limit to that level but no higher.

The legislation passed by the House on Tuesday would allow for the loan cap to reach $829,750 in some circumstances.

Under existing rules, loans that exceed $362,000 are not FHA eligible, which has effectively eliminated the program along the East and West coasts.

Although the program has traditionally been a resource for low-income first-time home buyers, many turned to the easy loan terms of sub-prime mortgages during the recent housing boom.

The FHA share of new mortgages slipped from 9.1% to 1.8% from 1996 to 2006, according to industry publication Inside Mortgage Finance.

Financial markets have been shaken in recent weeks as the number of failing mortgages, particularly sub-prime loans, has climbed.

About 200,000 troubled borrowers could win new mortgage terms if the FHA were modernized, according to the Department of Housing and Urban Development. Even without a new law, 80,000 troubled borrowers could save their homes in 2008 despite having missed some mortgage payments under a loosening of FHA rules announced by President Bush late last month.

“We have just about reached our limit under our present authority. . . . Without modernization, FHA simply cannot do much more,” Brian Montgomery, the FHA commissioner, said after the vote Tuesday.

Brad Zimmerman over at NuWire Investor recently wrote this:

As far back as the Great Depression, Federal Housing Administration (FHA) loans have been helping Americans with poor credit buy homes. Recently lost in the shuffle of skyrocketing housing prices and a wave of subprime loans, the FHA loan is back.

The late 1990s and early 2000s were not good to the FHA loan, as its stringent guidelines and mortgage limits were pushed aside by the easier-to-obtain subprime loan. The subprime loans offered lax qualifications such as higher debt-to-income (DTI) ratios and no-money-down options. In addition, subprime loans did not have as many strings attached to them such as the strict appraisal process. For most people, the subprime loan was clearly the more attractive choice, and the FHA loan began to fade into oblivion.

Recently, though, a steep rise in foreclosures and subprime lenders filing for bankruptcy has had a negative impact on the once popular subprime loan. As the subprime loans are disappearing, the old FHA loan is now making a comeback. Most people who were familiar with the FHA loan prior to its virtual disappearance might not realize that the program as it exists today is very different.

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Not everyone in the country is thrilled with the new plans by the government to help provide morgage relief to homeowners. (The good news for struggling homeowners is that opinions like this cannot stop us from helping you out!) Here is an opinion piece in the Wall Street Journal on the subject:

Saturday, September 22, 2007 12:01 a.m. EDT

This week the House of Representatives overwhelmingly approved a plan to erase billions of dollars of subprime loan defaults in the private mortgage industry. How? By making taxpayers responsible for future losses.

The Bush Administration recently announced support for a similar plan, and the housing industry is in full lobbying mode. One of the lone skeptics is Alabama Senator Richard Shelby, who warns that this could be one of the most expensive federal bailouts since the savings and loan crisis of the late 1980s. He’s on to something.

The goal of these bailout plans is at least admirable–to ensure that subprime borrowers don’t lose their homes to foreclosure, which is a clear and present danger given that some two million adjustable rate mortgages will roll over at higher interest rates in the months ahead. The Bush plan would give the Federal Housing Administration (FHA), Uncle Sam’s Depression-era housing agency, the authority to help as many as 80,000 subprime borrowers refinance mortgages at lower interest rates by insuring those loans against default.

No one wants to see borrowers lose their homes, and the good news is that private lenders are already working with late-payment borrowers to refinance the terms of these subprime loans. What’s troubling about the FHA expansion plan is that the insurance guarantee places taxpayers atop the housing bubble. Uncle Sam would insure tens of billions of dollars in new mortgage liabilities, and just when default levels are cascading.

Worse, both the White House and Congress want to suspend the FHA’s downpayment requirements to insure even zero-equity loans. They should read a new study by the Office of Federal Housing Enterprise Oversight (OFHEO), which reviewed 5,000 FHA loans and found that borrowers “who make no downpayment at all have the highest default rates.” Sometimes these default rates were three times higher than high downpayment loans. In the latest “FHA modernization” bill, some borrowers would have no equity in their home.

In some cases, those getting this federal guarantee would have a mortgage larger even than the value of the home. That’s because the FHA traditionally allows home borrowers to finance closing costs and the insurance premiums. If housing prices keep falling, home owners would have a financial incentive to walk away from the loan and leave it to taxpayers to pay off the balance.

FHA’s supporters claim this insurance can be expanded at no cost to taxpayers because FHA premiums more than cover annual losses from defaults. But this is like arguing that Social Security is solvent because it is running a “surplus” this year. According to the Bush Administration’s own actuarial projections, FHA already lacks the revenue stream to pay the expected claims on loans that go sour, though it claims expanding its loan portfolio will put it in the black.

In recent years, the U.S. Government Accountability Office and the federal Housing Department’s Inspector General have issued reports scoring the FHA for fraud, lax financial standards, and mission failure. The Inspector General reported in 2006 that “because of adverse loan performance,” the FHA’s “total costs exceed receipts on a present value basis.” It also noted that FHA has consistently underestimated default rates on its new loans.

Also in 2006, the Congressional Budget Office confirmed that “FHA’s insurance program imposes costs on the government and taxpayers” and “the subsidy cost of the FHA insurance is between 2 and 5 percent of the amount of the insured loans.” These subsidies are “free” to taxpayers only in the sense that Beltway accounting rules record future liabilities in invisible ink.

It’s a testament to the FHA’s underwriting ineptitude that, even during the biggest housing boom in a generation, the agency’s delinquency rate has somehow doubled over the last 10 years. In 2004, 2005 and 2006, the FHA’s delinquency rate was five times higher than the rate on conventional prime mortgage loans, double the rate on loans with private mortgage insurance, and even slightly higher than the rate on subprime loans. (See the nearby chart).

One recent FHA innovation was the “downpayment assistance program” in which a third party (sometimes the bank or the home seller) is permitted to fund the downpayment for the borrower. That program has suffered default rates as high as 20%–five times higher than on the typical mortgage.

FHA’s market share fell to an all-time low of 4% of all loans in 2006, down from 19% a decade ago. The Bush Administration should have worked to get that percentage to zero and mothballed an obsolete New Deal agency. Instead, HUD bureaucrats and the housing industry keep inventing new missions for the agency, such as the “zero downpayment” program. FHA now wants to elbow its way into the upscale market by expanding the size of a loan it can insure to as much as $417,000–which would make subsidized mortgage insurance a kind of universal entitlement.

We wonder if either end of Pennsylvania Avenue grasps the irony of what they are proposing. At the very moment when private mortgage lenders are under pressure from regulators, rating agencies and shareholders to tighten underwriting to avoid another mortgage meltdown, the FHA is relaxing its standards so it can insure more questionable mortgages. If that is permitted to happen, America’s newest and largest subprime lender will be Uncle Sam. Don’t expect this story to have a happy taxpayer ending.

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.

There’s no lifeline in sight for subprime borrowers, who face an average increase of 26 percent, or $400 a month, according to CoreLogic. Falling prices and a rising inventory of unsold homes make it difficult or impossible to sell or refinance without losing money and government programs aren’t designed to aid the most desperate. That leaves foreclosure as the only alternative, and one that will deepen and prolong the worst housing downturn in at least 16 years.

Vanishing Equity

Robert Murray of Middletown, New Jersey, said he didn’t pay enough attention when he took out a five-year adjustable-rate mortgage in 2002. This month, his payments ballooned to $1,800 from $1,300. Because he makes about $90,000 a year at his Newark Liberty International Airport maintenance job and hasn’t missed a payment, he said he hoped he might be a good candidate to refinance.

Since the value of his home has declined from the $265,000 he owes on two mortgages, Murray’s equity has vanished. If Murray were to apply for an FHA-insured refinance, he’d be out of luck.

The FHA bailout program, called FHASecure, requires the borrower to have at least 3 percent equity in the home. Some borrowers can get a second mortgage in addition to the FHA loan to cover the entire value of their houses. Murray borrowed more than his home is now worth, so he would have to write a check of at least $45,000 to close a refinance. He doesn’t have the cash.

“I’m way upside down,” Murray said. “The payments will kill me now. I don’t know what I’m going to do.”

Home Prices

About 48 percent of subprime borrowers wouldn’t qualify to refinance into a mortgage that conforms to the underwriting rules established by government-sponsored agencies Fannie Mae in Washington and Freddie Mac in McLean, Virginia, according to a report by New York-based analysts for UBS AG, Switzerland’s largest bank.

“There are a number of people who have mortgage debt that’s more than the value of their house, and a lot of those people are going to walk away,” said David Olson, president of Wholesale Access Mortgage Research & Consulting Inc. in Columbia, Maryland. “That will put more homes on the market, which already has too many.”

The Federal Reserve’s half-point benchmark interest rate cut yesterday will have little impact on borrowers whose mortgages are adjusting, said Ed Leamer, director of the UCLA Anderson Forecast in Los Angeles.

“It’s not going to alter the housing situation, or clarify defaults and delinquencies,” Leamer said.

U.S. home prices fell by a record 3.2 percent in the second quarter, according to the S&P/Case-Shiller Index. Lawrence Yun, chief economist for the Chicago-based National Association of Realtors, has warned that year-over-year prices will fall for the first time since the Great Depression of the 1930s.

`Painful for People’

It would take 9.6 months to sell off all the existing homes on the market, the longest amount of time in at least eight years, according to the Chicago-based realtors group.

Listings in the Orlando, Florida, area show 26,300 homes for sale, a 20-month supply, said Gary Balanoff, a real estate broker with ReMax Select in Oviedo, Florida.

“I’ve been in business 23 years, and I’ve never seen some of the price reductions we have here,” Balanoff said. “It’s painful for people.”

Investors, too, seem to be looking to Washington for solutions to subprime problems that may never come, said Andrew Laperriere, a Washington-based managing director at research firm International Strategy & Investment Group. The three rallies in the Standard & Poor’s 500 since its July 19 peak came after Fannie Mae and Freddie Mac suggested Aug. 8 that they could widen their portfolios, the Federal Reserve lowered its discount rate on Aug. 17, and Bush’s establishment of FHASecure on Aug. 31, Laperriere said.

`No Silver Bullet’

“There is no silver bullet from Washington that will prevent home prices from falling further,” Laperriere said. “A lot of people are operating on a mistaken impression.”

The fact that more than a quarter of subprime borrowers default on their adjustable loans before the rates reset makes a political solution less likely, Laperriere said.

“The myth here is that the resets have been the driver of payment delinquencies, but the fact is if the borrower can’t afford the teaser rate payments, then they can’t afford to ever pay back the loan,” he said.

FHASecure expands the number of borrowers eligible for FHA- guaranteed loans to include homeowners in default. FHA borrowers take out loans from about 8,500 qualified lenders, paying an added insurance premium. Their monthly payments are guaranteed by the Federal Housing Administration, which covers defaults from the pool of insurance payments, using no taxpayer money.

In addition to not missing any payments before their mortgages reset and having at least 3 percent equity in their homes, eligible borrowers must have a job and the income to cover the payments, said Steve O’Halloran, spokesman for the Department of Housing and Urban Development, which oversees the FHA.

Parochial School

FHASecure is expected to help as many as 120,000 borrowers refinance into FHA-backed loans this year, double the number of last year, O’Halloran said.

For now, Murray will struggle to make his monthly payments, foregoing vacations, restaurants and perhaps parochial school for his 5-year-old daughter. He yearns for help from the government.

The Federal Reserve Bank pumped $62 billion into the banking system on Aug. 9 and Aug. 10 in an effort to soothe a credit crisis. Murray said the Fed should do the same for borrowers.

“If they gave us that money, we’d be able to be out of this predicament,” he said.

Subprime mortgages are available to borrowers with bad or incomplete credit histories. They made up about 20 percent of home loans issued last year and about 11 percent in the first half of this year, according to Inside Mortgage Finance, an industry newsletter.

New Foreclosures

The number of adjustable-rate subprime mortgages rose to 72.5 percent, or $1.26 trillion, of all adjustable-rate loans outstanding in the first quarter, a 17-fold increase over 2001, UBS said.

About 57 percent of mortgage broker customers with adjustable-rate mortgages were unable to refinance into a new loan in August, according to a study by Campbell Communications, a market research firm in Washington.

Adjustable-rate mortgages to subprime borrowers account for 44 percent of all new foreclosures, according to the Mortgage Bankers Association in Washington.

“A lot of the folks who are in trouble are in trouble even before their mortgage rate resets,” said Bert Ely, a banking consultant in Alexandria, Virginia. “They can’t refinance because they shouldn’t have gotten their mortgages in the first place.”

Adjustable-rate mortgages of all kinds worth $139.2 billion, the most ever, are scheduled to reset at higher interest rates in the next three months, according to First American LoanPerformance in San Francisco. Subprime adjustable- rate mortgages make up $84.4 billion of that total.

In the third quarter, $136.7 billion of mortgages were slated for reset, with subprime comprising $87.4 billion.

About 2.91 million subprime borrowers have adjustable-rate mortgages, about 90 percent of which will have reset at higher interest rates by the end of 2008, LoanPerformance said.

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.

The risk of moral hazard must be considered in designing government-backed programs; such programs should not bail out failed investors, as doing so would only encourage excessive risk-taking. One must also consider adverse selection; programs that provide credit to only the weakest eligible borrowers are likely to be more costly than those that serve a broader risk spectrum. Risk-based insurance premiums or tighter screening and monitoring by lenders can mitigate adverse selection. But ultimately such mechanisms have their limits, and no government program will be able to provide meaningful help to the highest-risk borrowers without a public subsidy. Whether such subsidies should be employed is a decision for the Congress.

The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are, to a limited extent, assisting in subprime refinancings and should be encouraged to provide products for subprime borrowers to the extent permitted by their charters. However, the GSE charters are likely to limit the ability of the GSEs to serve any but the most creditworthy subprime borrowers. Indeed, if GSE programs remove the strongest borrowers from the pool, the risks faced by other programs—such as a modernized FHA program—could be increased.

Some have suggested that the GSEs could help restore functioning in the secondary markets for non-conforming mortgages (specifically jumbo mortgages, those with principal value greater than $417,000) if the conforming-loan limits were raised. However, in my view, the reason that GSE securitizations are well-accepted in the secondary market is because they come with GSE-provided guarantees of financial performance, which market participants appear to treat as backed by the full faith and credit of the U.S. government, even though this federal guarantee does not exist. Evidently, market participants believe that, in the event of the failure of a GSE, the government would have no alternative but to come to the rescue. The perception, however inaccurate, that the GSEs are fully government-backed implies that investors have few incentives in their role as counterparties or creditors to act to constrain GSE risk-taking. Raising the conforming-loan limit would expand this implied guarantee to another portion of the mortgage market, reducing market discipline further. If, despite these considerations, the Congress were inclined to move in this direction, it should assess whether such action could be taken in a way that is both explicitly temporary and able to be implemented sufficiently promptly to serve its intended purpose. Any benefits that might conceivably accrue to this action would likely be lost if implementation were significantly delayed, as private securitization activity would likely be inhibited in the interim.

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 Berenbaum, executive vice president of the National Community Reinvestment Coalition, said that he expected consensus on key issues to “emerge quickly,” and that the bills are “substantially similar.”

Barney Frank, D-Mass., chairman of the House Financial Services Committee, thought a compromise could be reached, and Rep. Christopher Shays, R-4th District, a committee member, was also upbeat, saying the House bill gave “flexibility to support sound lending in the 21st century by enabling FHA to serve more subprime borrowers at reasonable rates and offer refinancing loan opportunities to struggling homeowners.”

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., who had to negotiate with Republicans to craft Wednesday’s legislation, has a long history of finding common legislative ground.

The goal is clear, he said: “A revitalized, strengthened and modernized FHA can be and, under this legislation, will be a source of this constructive, wealth-building credit, both for new homeowners and for people who are seeking a way out of the abusive loans in which they are currently trapped. ”

Dodd may have more clout because the House measure raises the amount of mortgages the FHA can back to 125 percent of the local median home price, or 175 percent of the loan limit allowed by Fannie Mae in high-cost areas, or whichever is lower.

The Senate bill, though, limits an FHA-insured loan to 100 percent of the median home price in an area, up from 95 percent, or $417,000, whichever is lower.

Currently, FHA loans cannot exceed $362,790, and limits vary depending on the housing market in certain areas. In Fairfield County, for instance, the cap is at the high end, but in Windham County, it’s lower.

The White House has said it “strongly opposes” any provision to allow such loans above $417,000, though the administration stopped short of saying it would veto a higher limit. A policy statement said the program “should remain targeted to traditionally underserved homebuyers, such as low- and moderate-income families.”

The administration and some senators are concerned that a higher FHA limit would get the government too involved in risky loans.

Dodd’s bill, which is expected to be considered by the full Senate this fall, would also:

# Lower down payments. Currently, FHA-insured loans require at least 3 percent down. The Dodd bill cuts that to 1.5 percent, in most cases. The down payment reduction had been a source of controversy; the 1.5 percent is seen as an important compromise. Some senators wanted to allow no money down. The House bill would allow no down payments.

# Make reverse mortgages easier to obtain. Elderly homeowners would find the loan limit up, a key provision championed by Republican committee members.

# Lower origination fees for elderly homeowners. The current fee is 2 percent; it would drop to 1.5 percent.

Dodd’s FHA measure has picked up strong support. Dodd’s chief collaborator was Sen. Mel Martinez, R-Fla., general chairman of the Republican National Committee, and letters of support came from the Mortgage Bankers Association, the Realtors, the Homebuilders, Bank of America, LendersOne, JP Morgan Chase, Wells Fargo and Countrywide.

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.

“A revitalized, strengthened, and modernized FHA can be — and, under this legislation, will be — a source of this constructive, wealth-building credit,” he said, “both for new homeowners and for people who are seeking a way out of the abusive loans in which they are currently trapped. ”

The FHA, created early in the New Deal to give homeowners a boost, was an important player in mortgage markets for years. But its influence waned in recent years, as lenders more aggressively sought subprime customers, and the FHA got a reputation as an unwieldy bureaucracy.

But Dodd and others wanted to bring the FHA back, and crafted the modernizing legislation.

Among the bill’s provisions:

# Higher FHA loan limits. Limits on an FHA loan can rise to 100 percent of the median home price in an area, up from 95 percent, or $417,000, whichever is lower.

Currently, FHA loans cannot exceed $200,160 to $362,790, depending on the housing market in certain areas. In Fairfield County, for instance, the cap is at the high end, but in Windham County, it’s the lower amount.

The White House has said it “strongly opposes” any provision to back mortgages above $417,000.

A policy statement said the program “should remain targeted to traditionally underserved homebuyers, such as low and moderate income families.”

# Smaller down payments. Currently, such loans require at least 3 percent down. The Dodd bill cuts that to 1.5 percent, in most cases. The down payment reduction had been a source of controversy, and the 1.5 percent limit is seen as an important compromise. Some senators wanted to allow no money down.

# Easier-to-get reverse mortgages. Elderly homeowners would find the loan limit up, a key provision championed by Republican committee members.

# Lower origination fees for elderly homeowners. The current fee is 2 percent; it would drop to 1.5 percent.

The FHA measure has picked up strong support. Dodd’s chief collaborator was Sen. Mel Martinez, D-Fla., general chairman of the Republican National Committee, and letters of support came from the Mortgage Bankers Association, the Realtors, the Homebuilders, and lenders such as Bank of America, LendersOne, JP Morgan Chase, Wells Fargo and Countrywide.

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.

Who qualifies for these loans?

FHA officials say about 80,0000 more Americans will be able to refinance with FHA Secure, on top of the estimated 160,000 already expected to use FHA in the next year or so.

Critics of the program point out that this is only a fraction of homeowners in trouble. A host of groups, including the Assn. of Community Organizations for Reform Now and AARP, are calling on the administration to do more.

To qualify:

* Even if you’re in default today, you must have had a history of on-time payments until your so-called teaser rate expired and the interest on your adjustable-rate mortgage reset.

* The interest rate must have been scheduled to reset between June 2005 and December 2009.

* You must have 3% cash or equity in your home.

* You have to show a history of sustained employment.

* You have to prove you will have sufficient income to make the FHA Secure loan payment.

What’s the maximum loan amount under the program?

FHA limits vary by county. In most major California cities, the maximum FHA loan for a single-family home is $362,790.

What if my mortgage is more than that?

An FHA proposal would hike the loan limit to $417,000. The proposal had been stalled in Congress but appears to be gaining steam and may be at the top of the priority list when lawmakers return from recess.

What about the interest rate?

An FHA loan is only modestly more costly than an ordinary loan, said Jeff Lazerson, a Laguna Niguel mortgage broker. Current rates for a traditional, so-called conforming loan averaged 6.09% on Friday, according to BankRate.com.

If you have a small down payment, lenders charge more — closer to 6.5%.

The FHA also charges a 1.5% upfront insurance premium, plus 0.5% a year, which could bring the total annual loan rate to 7% or higher. On a $350,000 loan, that would mean a $2,329 monthly payment.

That’s not cheap, to be sure, but many sub-prime borrowers are paying 10% or more, Lazerson said. At 10%, the monthly payment on a $350,000 mortgage would be $3,071.

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.”

A bailout of lenders, Bush said, would only encourage similar situations in the future.

“It’s not the government’s job to bail out speculators or those who made the decision to buy a home they knew they could never afford,” Bush said.

But he said many homeowners could be helped if their lenders are flexible with mortgage terms and the government offers them modest help. Read more about Bush’s proposals.

Bush’s plan would reportedly allow about 80,000 homeowners to refinance their mortgage. Some groups have estimated that as many as 2 million homeowners are at risk of foreclosure.

Bush is also proposing a temporary change to the tax code that penalizes borrowers who refinance their mortgage terms and a new initiative aimed at preventing foreclosure.

“This is not going to reverse things,” wrote David Ader, bond strategist for RBS Greenwich Capital. “This proposal is something that may help a small slice of the market, but we don’t see it as a broad solution.”

Many other ideas have been floated in recent weeks to help homeowners who face staggeringly high payments on adjustable-rate mortgages taken out in 2005, 2006 and 2007, including giving Fannie Mae and Freddie Mac a bigger role, or even creating a new federal bureaucracy to bail out homeowners. Read our story about the many proposals.

U.S. stocks climbed Friday after Bush spoke, with traders also focusing on a speech by Federal Reserve Chairman Ben Bernanke. Bernanke repeated his warning that housing problems could weaken the economy, and said that the Fed was prepared to act if needed.

“Prospects of the administration joining the Fed in tackling subprime issues are helping markets believe that the current crisis will not be as protracted as previously feared,” said analysts from Anglo Irish Bank in a note to clients.

Some other proposals will require legislation from Congress, such as changing the tax laws to make it easier for lenders to renegotiate loan terms, the reports said. See more on U.S. economy and politics

The Bush administration has previously asked Congress to eliminate rules requiring a 3% down payment and raise the size of loans that the FHA can insure, from $362,790 to $417,000, according to media reports.

Congress may be receptive to FHA changes.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., for example, is backing an expanded role for the Depression-era agency.

On Friday, Dodd called Bush’s proposals “late” but said he’s hopeful they’ll result in changes that will benefit homeowners. Dodd is seeking his party’s nomination for the White House.

“I hope the president’s aggressive support will result in a strong bipartisan vote for FHA legislation when we take it up later this fall,” Dodd said in a statement.

On May 4, the House Financial Services Committee approved a bill allowing the agency to authorie zero down-payment loans and raise loan limits to serve high-cost housing markets. The bill is awaiting passage by the House.

Sen. Barack Obama, the Illinois Democrat also running for president, said Bush’s plans don’t go far enough and called for penalizing unscrupulous lenders and writing new disclosure requirements.

“After many Americans have seen their homes, their credit histories, and their financial well-being jeopardized the president is finally offering a proposal that helps a small fraction of homeowners,” Obama said in a statement Friday.

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?

In my opinion, the president’s proposal is an excellent start — but will it offer enough help to those half-million families at risk of losing their homes?

Bush isn’t proposing a direct bailout for homeowners who knowingly overextended themselves. Nor will the government be rescuing irresponsible lenders and speculative investors who bought homes to flip for a profit. As the president acknowledged, that would only encourage the problem to occur again.

Instead, Bush’s proposal strikes a balance by offering:

• Temporary tax relief to ensure that cancelled mortgage debt on a refinanced mortgage isn’t counted as income

• A foreclosure-avoidance initiative through homeowner education and outreach

• Ways to help responsible homeowners refinance through FHA loans offering a lower interest rate and lower monthly payments

Help for Those in Trouble

Among the president’s new initiatives is the immediate introduction of a refinancing product called FHASecure. This product will now be offered through the FHA and offers help to homeowners who are already in default of their primary residence mortgage loans. Previously, the FHA would not insure refinanced loans from borrowers delinquent or in default, so this is a significant change.

There are specific criteria that must be met in order to qualify:

1. First and foremost, you must have a history of on-time mortgage payments before your teaser rate expired — which means you must have a decent credit history.

2. Your interest rate must have reset after June 2005 but before December 2009.

3. You must have at least 3 percent cash or equity in your home.

4. You must have a sustained history of employment.

5. You must have sufficient income to make your mortgage payments.

Beefing Up the FHA

Since 1934, the FHA has helped more than 34 million people become homeowners — not by lending them money directly, but by guaranteeing their loans. This reassures lenders who might otherwise be reluctant to make loans to buyers who don’t have a lot of money. Borrowers have always paid a set price for this insurance.

The president’s proposal seeks to introduce risk-based pricing, which will give borrowers with weaker credit more access to FHA loans. Rather than being denied an FHA loan, underserved borrowers will instead pay a slightly higher fee. This will allow them to refinance at a lower interest rate with more affordable monthly payments.

President Bush is also asking Congress to pass new legislation that would modernize the FHA. These proposed changes — including lower down payment requirements and higher maximum loan limits — would also help borrowers with weaker credit and lower incomes. Hopefully, Congress will act quickly.

Can the Fed Help?

Echoing the sentiments of President Bush, Federal Reserve Chairman Ben Bernanke also weighed in on the situation on Aug. 31. He stated that it’s not the responsibility of the Fed to protect lenders and investors from the consequences of their actions.

However, he also acknowledged that developments in certain financial markets, including those currently emerging with mortgages, could have broad economic effects. As a result, the Federal Reserve will take those effects into account when determining policy.

Many believe the odds are growing that the Fed will cut the federal funds rate, now at 5.25 percent, by at least one-quarter percentage point on or before Sept. 18, its next regularly scheduled meeting. The Fed hasn’t lowered this rate in four years.

That could be good news if you currently have an adjustable rate mortgage. Even a mild rate cut of .25 percent might mean a slightly lower payment for you now. A cut of .75 percent would create significant breathing room for those on a tight budget, and could potentially send the stock market on a tear. My prediction is that the rate will get cut between 25 and 50 basis points.

Other encouraging news came on the Tuesday after Labor Day, when the Fed put added pressure on loan-servicing companies to modify loan terms or defer payments for borrowers having trouble making their mortgage payments and facing default.

Take Action Now

With the combination of new and current programs, the FHA estimates that it will be able to help 240,000 American families avoid foreclosure.

Only lenders approved by the Federal Housing Administration can process an FHA loan for you. If your adjustable rate mortgage has reset or is about to reset, call your lender and ask if they offer FHA loans and find out whether you qualify. The FHA web site offers loads of additional information, and includes a search feature to find an approved lender in your area.

In two previous columns (”Adjusting to Higher Mortgage Payments” and “Six Steps to Avoiding Foreclosure”), I advised those of you with an adjustable rate mortgage that’ll reset this year to call your lender and find out about refinancing options. Have you reviewed your mortgage documents and made that phone call yet?

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