Government Refinance Assistance

The FHA reform bill that passed in the House is a lot more aggressive than the bill that passed in the Senate. Here is an excerpt from an excellent article discussing the details of each from Les Christie over at CNNMoney.com:

NEW YORK (CNNMoney.com) — A Senate bill that would expand the functions of the Federal Housing Administration (FHA) could help upwards of 200,000 homeowners - though a similar House bill that passed last month is more aggressive.

Christopher Dodd (D - Conn.), the sponsor of the Senate bill, which passed last week, hopes to make low-cost, fixed-rate mortgages available to more homebuyers and to homeowners seeking to refinance out of expensive adjustable rate mortgages (ARMs).

“This measure can shield homeowners from harm by helping families find safe, fair and affordable mortgages,” said Dodd in a statement. It can help provide credit, both for new homeowners and those seeking a way out of abusive loans in which they are currently trapped.”

FHA-insured loans have become an important element in the proposed solutions to the subprime mortgage crisis. There is bipartisan Congressional support for the measures and from the Bush administration.

FHA mortgages are consumer friendly loans made by private banks that are insured by the government. That makes them especially attractive to lenders because the government guarantee enables the lenders to easily sell off the loans.

Borrowers pay up-front premiums of 1.5 percent of the loan value, and 0.5 percent of the monthly payment each month. In return for that premium, the borrower gets a loan at a reasonable rate. The premium ends when the loan balance dips to less than 78 percent of the value of the home.

The Senate FHA-modernization bill differs in some significant ways from the House bill and is in addition to the FHASecure program that launched last summer, and was geared toward helping delinquent subprime borrowers refinance into affordable, fixed-rate loans.

Both the House and the Senate versions raise cap limits, the maximum dollar amount of mortgages that are eligible for FHA insurance, but the House bill is much more aggressive in nearly every one of its provisions.

The House would set the cap at $729,750, which is more than twice its current amount. That will give many more home buyers, especially those in high-priced areas like California, access to FHA-insured loans.

The cap under the Senate bill would max out at $417,000, the same amount as loans conforming to Freddie Mac and Fannie Mae limits.

If the House cap limit is adopted, the rough estimate of 200,000 eligible for help will expand, according to Bill Glavin, special assistant to the FHA commissioner.

The cap for low-priced areas in both bills would be raised to $271,050, again allowing more homebuyers into the program. The previous maximum was $200,160, less than the cost of building in many areas. “[With that cap] we’ve been priced out of new construction,” said Glavin.

The House will also allow more people in by accepting no-money-down deals, unlike the current policy, which mandates a 3 percent down payment. The Senate bill still requires a down payment but halves it to 1.5 percent.

In addition, the House bill would extend the maximum term of the mortgage to 40 years from 35, again making the loans affordable for more homebuyers. The Senate bill does not change the term limit.

Another difference is that the House bill would introduce risk-based pricing into the FHA program for buyers putting down less than 3 percent. That would mean higher premiums for borrowers to pay for their greater risk of default. The Senate bill calls for a 12-month moratorium on the implementation of risk-based pricing.

Both bills relax the strict provisions that have kept FHA insured mortgages of limited use in buying condos and manufactured homes.

Michael Crittenden recently reported on the FHA reform bill that easily passed a vote in the senate. If it can get past the House and the President getting an FHA loan will become easier for quite a few people. See below:

WASHINGTON — The Senate passed legislation overhauling the Federal Housing Administration on Friday, a move lawmakers described as a “basic first step” to combat rising foreclosures and a broader housing crisis.

The legislation would increase the size of loans the FHA could insure, make counseling more available to homeowners and reduce down payments for borrowers getting an FHA loan. If enacted, it would be the first major piece of legislation passed this year addressing the problems in the mortgage markets.

The House passed its version of the legislation in September, and the White House has said it supports congressional efforts to modernize the FHA. House and Senate members will now have to resolve a number of differences between the two pieces of legislation. Of note is House language dedicating $300 million of FHA profits to an affordable housing trust fund that is a priority of House Financial Services Chairman Barney Frank (D., Mass.).

The Senate bill doesn’t include trust-fund language. At a news conference, Sen. Jack Reed, a Rhode Island Democrat, offered tepid support for adding it to the Senate bill.

“My sense is that if we can get a housing trust-fund mechanism through this vehicle it would be helpful,” Mr. Reed said. He said he would prefer creating a trust fund as part of legislation overhauling regulation of Fannie Mae and Freddie Mac.

Sen. Charles Schumer (D., N.Y.) played down the differences between the bills, saying it would be “pretty easy” to reach a compromise. Still, Mr. Schumer said the timing of such talks remains up in the air.

The Senate legislation would increase the size of loans the FHA is allowed to insure for first-time and low-income homeowners. The level would be set at the size of mortgages Fannie Mae and Freddie Mac are allowed to purchase, currently tabbed at $417,000 and referred to as the “conforming loan limit.”

Additionally, the Senate bill would require homeowners to make a cash investment of at least 1.5% in the value of a home. That is half what the FHA currently requires.

Another Fed interest rate cut might bode well for FHA loan rates. The Fed announced just such a cut today as reported by Martin Crutsinger for the AP:

WASHINGTON - The Federal Reserve cut a key interest rate by one-quarter of a percentage point Tuesday, trying to keep the country out of recession.

The reduction in the federal funds rate to 4.25 percent marked the third rate cut in the past three months. Fed officials signaled that further cuts were possible if a severe downturn in housing and a crisis in mortgage lending get worse.

Commercial banks were expected to quickly match the latest reduction by trimming their prime lending rate, which would reduce this benchmark rate for millions of consumer and business loans to 7.25 percent.

In addition to cutting the funds rate, the Fed announced it was reducing its discount rate, the interest it charges to make direct loans to banks, by a quarter-point as well to 4.75 percent. This reduction was aimed at encouraging banks to borrow more freely from the Fed at a time when there are worries that a rising number of bad loans will prompt banks to tighten credit conditions too severely, adding another strain on the already fragile economy.

The Fed embarked on this round of rate cuts in September in response to severe turbulence in credit markets around the globe as investors reacted to various reports of mounting losses from defaults in subprime mortgages, the latest fallout from the worst slump in the U.S. housing market in more than two decades.

After cutting the funds rate by a half-point on Sept. 11 and a quarter-point on Oct. 31, the central bank indicated that those two reductions might be all that were needed to combat the threat of a recession given that financial markets appeared to be stabilizing.

However, increased market turbulence following the October meeting and growing fears of a recession caused the Fed to do an about-face.

In a brief statement explaining its action, the Fed said that recent economic data indicated that the economy is slowing, “reflecting the intensification of the housing correction and some softening in business and consumer spending.”

The Fed also noted that “strains in financial markets have increased in recent weeks.”

In its Oct. 31 statement, the Fed said it viewed the risks from weak growth as roughly balanced with the risks of higher inflation.

However, that phrase was changed in the current statement to read, “Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation.”

The Fed vote for the rate cut was 9 to 1 with Eric S. Rosengren dissenting, arguing for a bigger, half-point cut in the funds rate.

Many economists believe the housing slump and credit turmoil have raised the risks of a recession. Many analysts believe that economic growth, as measured by the gross domestic product, may have dipped to a barely perceptible 1 percent rate, raising the chance that some shock, such as another surge in energy prices, could push the country into a recession.

But many analysts still believe the Fed will be able to respond forcefully enough with rate cuts that it will keep the current expansion alive. These analysts believe that the economy will start to rebound to faster growth by the middle of next year, when they expect that lower mortgage rates will have spurred a rebound in home sales.

“I think a full blown recession can be avoided but just barely,” said David Jones, chief economist at DMJ Advisors. He predicted that the Fed will follow up its December rate cut with three more reductions at its first three meetings of 2008.

Brian Louis with Bloomberg recently wrote the following report on some of the skepticism being expressed about the recent rate freeze plan from President Bush. (See and excerpt below and the full article here.) Let’s hope congress comes through with some useful tweaks to the FHA program to further help…

Dec. 7 (Bloomberg) — U.S. Treasury Secretary Henry Paulson’s plan to prevent as many as 1.2 million people from losing their homes by freezing interest rates on subprime adjustable-rate mortgages will bring no benefit to the depreciating housing market.

“At best, it may stop some of the hemorrhaging of the housing market, but it doesn’t necessarily turn things around,'’ said Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts. “The fundamental problem with housing is oversupply.'’

Existing home prices may fall as much as 15 percent by 2009 from their peak last year, even if interest rates are frozen on one fifth of 2006 subprime loans resetting next year, said Mark Zandi, chief economist at Moody’s Economy.com, a unit of New York-based Moody’s Corp. About 2.8 million mortgage loan defaults will occur in 2008 and 2009, Zandi said in Dec. 5 testimony before the U.S. Senate Judiciary Committee.

President George W. Bush agreed yesterday to a plan led by Paulson that freezes interest rates on some subprime mortgages for five years. The agreement focuses on borrowers who will fall behind on payments as low rates reset at higher levels.

“It’s long overdue that someone puts something on the table that’s enforceable and real and not just a press release,'’ said Prentiss Cox, a former assistant Minnesota attorney general who prosecuted predatory lending cases. He’s now an associate professor of clinical law at the University of Minnesota in Minneapolis.

Jeannine Aversa, an Economics Writer for the AP, recently wrote the following about the newly announced White House plans to help alleviate the mortgage problems many Americans are facing. It is worth your time:

WASHINGTON - Be ready to wait if you want to get information from a toll-free hot line about freezing the interest rate on your subprime mortgage.

Minutes after President Bush outlined a plan to help strapped homeowners, callers were told to have patience until a counselor could answer their questions and “devote as much time to you as necessary.”

But, once they do get through, homeowners may not find the answers they sought.

One caller to the hot line (1-888-995-HOPE) was told there would be “lots of hoops to jump through” to obtain the five-year freeze. The rate hold goes to the heart of the relief effort for people with subprime mortgages, which are loans offered to borrowers with tarnished credit or low incomes.

Even President Bush acknowledged the plan is “no perfect solution.” Treasury Secretary Henry Paulson said it was not a “silver bullet.”

Only a fraction of the homeowners who face huge jumps in their mortgage payments appear likely to be helped by the plan, negotiated by the Bush administration, to freeze the low introductory rates on their subprime loans for five years. After that, they could be in the same position again.

Homeowners dialing up their mortgage company to get their current rate frozen could be disappointed. The White House plan does not force mortgage companies to give eligible homeowners a break. It is voluntary.

The White House on Friday defended the system and its eligibility requirements.

“I wouldn’t call them `hoops,’” White House deputy press secretary Tony Fratto said. “I think we are trying to make sure, as we outlined yesterday, that we’re getting at the right population that can best be served by this program.”

Bush promoted the initiative Friday for the second day in a row, using his weekly radio address to call it “an example of the government bringing together members of the private sector to voluntarily address a national challenge — without taxpayer subsidies or government mandates.” The president taped his address for Saturday airing, and the White House released the transcript on Friday.

In first announcing the initiative on Thursday, Bush said 1.2 million people could be eligible for relief. Aid includes the rate freeze and helping people refinance into more affordable mortgages. The Center for Responsible Lending, a group that promotes homeownership and works to curb predatory lending, estimates that just 145,000 families will qualify for the rate freeze. The criteria are too strict, it says.

The White House plan is aimed at stemming foreclosures, which have shot up to record highs as the housing market has gone from boom to bust.

Subprime borrowers have been hardest hit by the meltdown. Initially low interest rates that reset to much higher rates have clobbered those borrowers. Nearly 2 million adjustable-rate subprime mortgages will reset from introductory rates of around 7 percent to 8 percent to much higher rates this year and next. That raises the specter of even more people being forced out of their homes because they cannot keep up with their monthly payments.

Rising home foreclosures are a headache for politicians and a danger for the economy.

Bush tried to shift blame for the crisis to the Democratic-led Congress.

“The Congress has not sent me a single bill to help homeowners,” Bush said.

One measure would give the Federal Housing Administration more flexibility; a second would change the tax laws temporarily to help people who have a portion of their mortgage forgiven by banks.

Sen. Charles Schumer, D-N.Y., complained the criteria for Bush’s mortgage freeze are too narrow to help most distressed homeowners and worried that legal challenges by investors might stall the effort.

“While we certainly all hope this will be a shot in the arm for the housing slump, it is hardly a panacea,” Schumer said. “There are too many families who may be left out, too much left up to the voluntary willingness of the private sector and too little disclosure and transparency to ensure families who do qualify are being helped.”

Under the plan outlined Thursday, the rate freeze offer would be available only to people who have not missed any mortgage payments at their introductory interest rate. It also would apply only to loans taken out between 2005 and this past July 31 and scheduled to rise to higher rates in Jan. 1, 2008, and July 31, 2010. To make sure speculators don’t get the break, the rate freeze offer applies only to people living in their homes.

The idea behind the administration-negotiated plan is that the five-year freeze will buy time for the housing sales and prices to start rising again. Such a rebound would enable homeowners to refinance their current adjustable rate mortgages into fixed-rate loans with more affordable monthly payments. But some people who want to buy homes and have been priced out of the market are upset that there’s no help in sight for them.

Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association in the third quarter, a record, 18.81 percent of them were past due. A record, 4.72 percent of the loans entered into the foreclosure process during that period.

Meanwhile, there still is the possibility that investors, who were counting on bigger returns from the higher rate resets, will balk at extending the duration of the lower rate.

George Miller, executive director of the American Securitization Forum, whose members include investors, ratings agencies and other financial players, backed the White House’s effort and developed streamlined procedures for lenders to follow when sorting through borrowers’ requests for relief. He was hopeful lawsuits could be avoided, but he struck a note of caution.

“Certainly, there is no complete insulation from legal exposure,” Miller said.

There is decent news today for those of your with adjustable rate mortgages. President Bush just announced a plan to freeze rate hikes on ARMs going forward for a few years. However, the freeze would only apply to people who stay on time with all of their mortgage payments so do not get late if you want to keep your current interest rate! Here is a quote from from the article:

The mortgage companies will offer to freeze the loans at the lower introductory rates as long as the borrowers did not miss any payments at the lower rate.

Also:

Under the administration plan, the rate freeze will apply to loans made at the start of 2005 through July 30 of this year and will cover loans that had been scheduled to rise to higher rates between Jan. 1, 2008, and July 31, 2010.

The plan represents an about-face for Paulson, who until recently had insisted the mortgage crisis could be handled on a case-by-case basis. However, he and other administration officials became convinced the tide of foreclosures threatened by the mortgage resets represented such a severe threat that a more sweeping approach was needed.

Read the whole article here.

It’s true. See the report by Associated Press reporters Deb Reichmann and Nedra Pickler here:

WASHINGTON - The Bush administration has hammered out an agreement to freeze interest rates for certain subprime mortgages for five years to combat a soaring tide of foreclosures, congressional aides said Wednesday.

The aides, who spoke on condition of anonymity because the details have not yet been released, said the five-year moratorium represented a compromise between desires by banking regulators for a longer time frame of up to seven years and mortgage industry arguments that the freeze should last only one or two years.

Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.

The administration said President Bush will speak on the agreement at the White House on Thursday and the Treasury Department announced that Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson would hold a joint news conference Thursday afternoon with mortgage industry officials.

Treasury also announced there would be a technical briefing to explain more of the proposal’s details.

Paulson, who has been leading the effort to craft a plan, said on Monday that the program would only be available for owner-occupied homes — to ensure the break is not given to real estate speculators.

The plan emerged from talks between Paulson and other banking regulators and banks, mortgage investors and consumer groups trying to address an avalanche of foreclosures feared as an estimated 2 million subprime mortgages reset from lower introductory rates to higher rates.

In many cases, the higher rates will boost monthly payments by as much as 30 percent, making it very difficult for many people to keep current with their loans.

The plan is aimed at homeowners who are making payments on time at lower introductory mortgage rates but cannot afford a higher adjusted rate.

Through October, there were about 1.8 million foreclosure filings nationwide, compared with about 1.3 million in all of 2006, according to Irvine, Calif.-based RealtyTrac Inc. With home loan defaults still rising, the trend is expected to worsen next year.

The plan represents an about-face for Paulson, who until recently had insisted the mortgage crisis could be handled on a case-by-case basis. However, he and other administration officials became convinced the tide of foreclosures threatened by the mortgage resets represented such a severe threat that a more sweeping approach was needed. They opted for a proposal that was along the lines of a plan put forward in October by Sheila Bair, head of the Federal Deposit Insurance Corp.

Paulson and other federal regulators began holding talks with some of the country’s biggest mortgage lenders, mortgage service companies, investors who hold mortgage-backed securities and nonprofit groups that provide counseling for at-risk homeowners.

Under the typical subprime loan — those offered to borrowers with spotty credit histories — the rates for the first two years were at levels around 7 percent to 9 percent. But after two years, those rates were scheduled to reset to levels around 9 percent to 11 percent.

For a typical $1,200 monthly mortgage payment, the reset could add another $350 to the monthly payment, greatly raising the risks of loan defaults by homeowners struggling with the current payment.

The wave of mortgage foreclosures threatened to make the most severe slump in housing even worse by dumping more foreclosed properties onto an already glutted market, further depressing home prices and shaking consumer confidence.

The deepening housing slump has already roiled financial markets, starting in August, as investors grew increasingly concerned about billions of dollars of losses being suffered by banks, hedge funds and other investors.

The administration plan is designed to deal with the crisis by letting subprime borrowers who are living in their homes and are current on their payments to avoid a costly reset for five years. The hope is that by that time the housing downturn will have stabilized, clearing out the glut of unsold homes and halting the steep slide in prices that is hitting many parts of the country.

With sales and prices once again rising, the expectation is that homeowners will be able to renegotiate their current adjustable rate mortgages into a more affordable fixed-rate plan.

The housing crisis has become an issue in the presidential race with Democrats Hillary Rodham Clinton and John Edwards putting forward their own proposals this week that would go further than the administration.

Clinton said her own proposal that would impose a 90-day moratorium on foreclosures and freeze the rates for five years or until they had been converted to fixed-rate loans was a better approach that would help more people.

“Although the administration is finally giving the foreclosure crisis the attention it deserves, it seems that President Bush is going to give struggling homeowners far less than they need,” she said in a statement.

Mark Zandi, chief economist for Moody’s Economy.com, called the administration plan a good first step, but said the government eventually will have to go further given the problem’s size and the threat to the economy.

“This is the most serious housing downturn we have seen in the post World War II period,” Zandi said. “It is a threat to the broader economy. The risks of a recession are very high.”

The new FHASecure program is not offering much help to Californians. The problem is that loan limits on FHA still max out bout $362,000. How many houses in California are that price range? Not many. So while FHASecure is a lovely idea it leaves Americans in the more expensive areas of the country out in the cold still.

Here is an excerpt from an recent article on that subject written by Matt Wrye over at the San Bernardino County Sun:

The Inland Empire is ground zero for the housing meltdown.

But you’d never know it by looking at a new federal program that seems to slight California homeowners.

Figures provided by the Federal Housing Administration show that California homeowners make up only 3 percent of total loans offered nationwide under a new bailout program designed to help them avoid foreclosures. Inland Empire borrowers make up just under 1 percent - in an area that reports the third-biggest number of foreclosures in the nation.

Troubled Inland Empire homeowners looking at the possibility of losing their homes are finding it tough to qualify for the federal program.

The Federal Housing Administration promised in August to help 240,000 families avoid foreclosure through its so-called FHA Secure plan.

Experts say California’s higher- than-average loan amounts confound the issue.

“We have people calling, but when you look at what their real income is and what their debts are, it doesn’t pencil out,” said Will Herring, a local mortgage broker and board member of the California Association of Mortgage Brokers, Inland Empire Chapter in Rancho Cucamonga. “They don’t conform to FHA guidelines.”

So far, 290 subprime borrowers - 13 of them in default - throughout San Bernardino, Riverside and Orange counties have secured refinancing through the program.

Ruth Simon over at the Wall Street Journal put up the following excellent article regarding recent comments by Eric Rosengren, the president of the Federal Reserve Bank of Boston:

Many borrowers with subprime mortgages have reasonably good credit and may be able to refinance into a less costly mortgage by taking advantage of government programs, Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a speech this morning.

Pulling from research conducted by members of the bank’s staff, Mr. Rosengren noted that 55% of subprime adjustable-rate mortgages, where the owner occupied the home, hadn’t missed a mortgage payment in the past year. That translates to about 1.2 million borrowers.

“These subprime borrowers may meet the credit standards required for FHA [Federal Housing Administration] guarantees or for similar state programs, with potentially a significant savings,” Mr. Rosengren said in his speech, delivered in Boston at a breakfast sponsored by the Massachusetts Institute for a New Commonwealth. In addition, half of borrowers nationally — and 71% of those in New England — had “reasonable credit scores” of above 620 when they took out their mortgage. (Read the full speech.)

FHA is a division of the U.S. Department of Housing and Urban Development that insures loans originated by banks and other companies. FHA was designed to provide insurance for first-time homebuyers and low- and middle-income borrowers, but the program became less popular as subprime and exotic mortgage products developed over the last decade. Mr. Rosengren suggested that lack of knowledge of these programs may have kept borrowers away.

Moreover, Mr. Rosengren said research by the Boston Fed shows that 20% of borrowers with subprime ARMS nationally — and 26% of these borrowers in New England — should be able to “relatively easily” refinance into a prime mortgage or a loan guarantee program. At the time they took out their original loan, these borrowers had credit scores above 620, at least 10% equity in their homes, provided full documentation of their income and assets and said they planned to live in the home.

The analysis by the Boston Fed looked at loans that were packaged into securities and sold to investors.

Mr. Rosengren’s speech comes among increasing concern about borrowers who face higher monthly payments because the rate on their subprime adjustable-rate mortgage will rise — or reset. As much as $362 billion in subprime home mortgages with adjustable interest rates are due to reset at a potentially higher rates in the coming year, according to Banc of America Securities. The fear is that many of these borrowers won’t be able to afford these higher rates and will be unable to refinance because of tighter lending standards and falling home prices.

Government officials are pushing mortgage companies to freeze interest rates on certain subprime loans. Details of that plan still are under discussion. Mr. Rosengren declined to comment on the specifics of the administration’s plan, noting that it hadn’t been finalized. But in his speech, he urged lenders to extend the teaser rate “or refinance borrowers into fixed-rate loans wherever possible.”

Mr. Rosengren also called on lenders to expand their efforts to refinance these subprime borrowers and to take a “fresh look” at the FHA program. “Banks may not have viewed this market as an engaging opportunity when mortgage brokers were aggressively going after the business, but banks may now find profitable lending opportunities in the current environment.”

In addition, Mr. Rosengren said that it “probably makes some sense” for FHA to raise the maximum amount it will finance in certain high cost markets above the current $363,000 level for single-family homes and called on the agency to streamline its appraisal and approval process and beef up outreach to borrowers and lenders. He also suggested that state programs, which have traditionally focused on first-time home buyers, should increase their efforts to refinance borrowers with subprime loans.

In an interview, Mr. Rosengren urged borrowers to seek out lenders who offer FHA loans. “Part of the problem is that it is not that straightforward to find a lender that is an FHA lender,” he said. “Borrowers do have to look around.” In many cases, borrowers who received a subprime loan “may have been better off with an FHA product,” where rates are often two percentage points or more below the rates on subprime loans. The FHA program provides for financing to borrowers who have as little as 3% equity and doesn’t require a minimum credit score.

Many borrowers with subprime ARMs were paying relatively high mortgage rates even before their loan reset, Mr. Rosengren said. Nationally, the average rate on a so-called 2-28 loan, which carries a fixed-rate for two years and then resets annually, was 8%.