Government Refinance Assistance

Neil Roland over at Bloomberg put up this update today about the pending Senate FHA bill:

Oct. 3 (Bloomberg) — The U.S. Senate is likely to pass a bill to give home buyers an alternative to subprime loans by making it easier for them to get mortgage insurance from the government, Senator Charles Schumer said.

The bill, which passed the Senate Banking Committee last month, would raise loan limits for home buyers and lower their required down payments. The House passed a similar measure last month with more generous provisions for home buyers.

“Raising FHA limits is long overdue,” Schumer, 56, a New York Democrat who heads the Senate Banking subcommittee on housing, said in an interview today.

Congress and the Bush administration are trying to address the worst housing slump in 16 years by turning to the FHA to aid some of the more than 2 million homeowners who have fallen behind on mortgage payments.

The Senate bill would raise the loan limit to about $417,000 from the current $363,000, and lower the down payment requirement to about 1.5 percent from the current 3 percent minimum. The House bill would raise the loan limit to $730,000 and lower the down payment requirement to between zero and 3 percent.

Housing and Urban Development Inspector General Kenneth Donohue said in an April interview the FHA “has to make sure it doesn’t get taken by the lenders, and it has to make better reviews of loan portfolios.” He later gave similar testimony to Congress. Schumer today dismissed those concerns.

Donohue’s spokesman, Mike Zerega, didn’t immediately respond to requests for comment today.

`Playing Politics’

“Every day that Congress fails to act on FHA reform, more families are placed at unnecessary risk of foreclosure,” HUD Secretary Alphonso Jackson said in a statement today. “Congress should stop playing politics with homeowners’ financial security.”

Schumer spokesman Israel Klein and Senate Banking Committee spokesman Marvin Fast said they did not know when the full Senate is likely to consider the measure.

Jackson has said that the legislation would enable the FHA to assist an additional 200,000 borrowers. President George W. Bush said in August that the FHA would soon start helping 240,000 people refinance loans under a new program.

Jackson issued his statement after senior Democrats urged Bush to do more to address the housing crisis.

“Only in the last several weeks has the administration seemed to take notice, after the impact was felt on Wall Street,” said Senate Banking Committee Chairman Chris Dodd of Connecticut.

The FHA provides mortgage insurance for loans made by private lenders to low- and middle-income home buyers. The bills would give the FHA more tools to help refinance loans to subprime borrowers facing ballooning interest on their mortgages.

Tim Westrich over at the Center For American Progress wondered today if the new FHA reforms will be enough. Here is an excerpt:

The Senate will soon take up legislation that would give low- and moderate-income homeowners who are struggling with their mortgage payments some much needed relief—with the potential of being signed into law before the year’s end. Many families are dealing with adjustable-rate mortgages, and will likely face higher monthly payments when their rates reset over the next two years. These resets have the potential to drive even more homeowners into default and eventually into foreclosure in a very short period of time.

The Federal Housing Administration Modernization Act of 2007 would give the FHA more flexibility to insure mortgages for higher-risk borrowers and step up its role in solving the mortgage meltdown. And a valuable amendment added by Sen. Jack Reed (D-RI) will provide struggling borrowers with financial counseling to help them refinance if it’s included in the final draft of the bill.

Help for homeowners couldn’t come sooner. But while the bill and especially the Reed amendment are useful first steps, we can—and should—do much more to reduce the fallout from the subprime mortgage crisis and help preserve neighborhoods, communities, and the limited wealth of low- and moderate-income families.

The amendment added by Sen. Reed is essential to making the legislation more effective. Added during committee-level deliberations, the amendment would expand the U.S. Department of Housing and Urban Development’s (HUD) post-purchase counseling program to any low- or moderate-income borrower who seeks it. Through expanded counseling, more families will be able to get the advice and assistance needed to stay in their homes. This critical provision will greatly assist homeowners as they navigate through the tricky transaction of a loan workout or refinance. The Reed bill also provides an additional $25 million for technology and program staffing for the FHA mortgage insurance programs.

Given that lenders modify only about 1 percent of delinquent loans, troubled borrowers’ access to knowledgeable and experienced advocates is critical.

President Bush and lawmakers on both sides of the aisle tout FHA reform as the remedy for families with subprime loans that are in default and nearing foreclosure. FHA-insured lending was once a powerful countercyclical market stabilizer, but as the market expanded in recent years and lenders got savvier at serving lower income borrowers, the program became increasingly irrelevant. This bill could potentially breathe new life into what once was a useful program for assisting the market in serving lower income borrowers, at precisely the time that lower income borrowers need it most.

The House of Representatives recently approved similar legislation in a resounding 348-to-72 vote. And while there are differences between the House and Senate bills, both would allow the FHA to reach a broader segment of borrowers by raising the loan limits for insurance eligibility under FHA, and by reducing the down payments home buyers must pay. The former provision makes FHA-insured loans a viable option for struggling homeowners in high-cost metropolitan areas, while the latter may help those who have lost equity in their homes due to falling property values, with the FHA underwriting standards for refinancing established at the same levels as for new borrowers.

This is a step in the right direction, but it does not go far enough to prevent a nation-wide foreclosure crisis from becoming an economy-wide slump. According to the Center for Responsible Lending, 2.2 million borrowers will lose their homes or have lost them already due to mortgages made from 1998 through 2006. FHA reform could go a long way in providing some relief, but the U.S. Department of Housing and Urban Development itself estimates that FHA reform can refinance only 240,000 homeowners in 2008. Even if it continues at a rate of 240,000 refinances per year, it will fall well short of the 2.2 million homeowners that will need foreclosure assistance in the next couple of years. While this legislation is certainly laudable—especially the increased opportunities for counseling—it ought to be one part of a package of solutions.

Most notably, even under an expanded FHA, the borrowers who need the most help may still not be deemed creditworthy for refinancing. Neither the regulatory changes made to date nor the current bills before Congress address the growing problem of borrowers—many of whom still have good credit—who cannot refinance because their homes are now worth less than their mortgage balances.

….

But if Congress wants to get serious about helping homeowners, congressional leaders should more thoughtfully address the mortgage meltdown by considering additional opportunities such as creating Homeownership Protection Centers and a national mortgage foreclosure assistance program, either in the current bill or in future legislation that will surely be needed.

Annette West recently published this interesting article on FHASecure over at the Las Cruces Sun-News:

FHA is a quasi-private agency regulated by the government whose purpose is to help low and moderate income Americans become homeowners. FHA does not make loans — it works with lenders to make it easier for you to get a loan.

The FHA has several popular programs. Using the 203(b) mortgage insurance program, you need only make a 3 percent down payment — instead of 20 percent — to purchase or refinance an owner-occupied residence.

What’s the catch?

You have to pay an upfront mortgage insurance premium of 1.5 percent of the original loan amount, which may be included in the loan amount. You also pay a monthly mortgage insurance premium of 0.5 percent of the original loan amount. You do that until you have a 78 percent loan-to-value ratio, or have built 22 percent equity in the property.

Now the FHA is adding a new refinancing program called FHASecure. Designed for people with good credit scores who have been paying their mortgage on time, the program is to help borrowers refinance their mortgage. This is expected to help an estimated 240,000 families avoid foreclosure.

Again, we ask, what’s the catch?

Eligible homeowners will be required to meet strict underwriting guidelines and pay a mortgage insurance premium, which offsets the risk to FHA’s insurance fund at no cost to the taxpayer. FHA will implement risk-based premiums that match the borrower’s credit profile with the insurance premium they pay, meaning that riskier borrowers pay more. This pricing structure will begin on Jan. 1.

To qualify, the homeowner must show:

1. A history of on-time mortgage payments before the borrower’s teaser rates expired and loans reset.

2. That their mortgage interest rates have, or will, reset between June 2005 and December 2009.

3. A 3-percent cash or equity in the home or more.

4. A sustained history of employment.

5. Sufficient income to make the new mortgage payment.

“FHASecure is designed for families who are good borrowers but were steered into high-cost loans with teaser rates,” said Assistant Secretary for Housing-FHA Commissioner Brian Montgomery.

“These homeowners, many of whom are minorities, need a safe, affordable mortgage product that will help build wealth. All FHA borrowers pay mortgage insurance premiums to offset claims to the FHA insurance fund and ultimately prevent risk to the taxpayer.”