Government Refinance Assistance

President Bush and his cabinet proposed a major overhaul of the US financial regulatory system today. See here for more details. The Democrats complained that it is not enough government intervention and that it does not address to mortgage crisis in the short run.

There is a lot a brainstorming going on in Washington as congress looks for ways to help homeowners avoid foreclosure. The FHA a central piece of one prominent plan. Here is an excerpt from a recent AP article on the subject:

A broader housing overhaul proposed by Dodd and Rep. Barney Frank, chairman of the House Financial Services Committee, faces an uncertain road.

Frank and Dodd want the Federal Housing Administration, the Depression-era agency that insures mortgages, to guarantee $300 billion to $400 billion in refinanced loans to troubled borrowers. Lenders would first have to agree to take a loss on the mortgages; borrowers would have to show they could afford to make payments on the new loans.

The plan would insert the government into the maelstrom of the subprime mortgage mess, with public money at risk should homeowners default. But it would rescue hundreds of thousands of borrowers from foreclosure and insure that lenders get something from their mortgages. That, in turn, could boost investor confidence in the value of mortgage-related investments.

“Some federal money is at risk, but we think we are doing the absolute maximum to protect the government and address the problem,” Frank said in an interview. “Unfortunately, the case for doing something gets stronger every day.”

Frank said he expects to send the measure through his committee in April. He is optimistic about getting at least some GOP support, especially given the pressures of the political calendar.

“For the Democrats, I don’t think you need an election to want to do this, but for the Republicans, it may make a difference, particularly for people from those areas that have been hardest hit,” said Frank, who is planning two days of hearings early next month.

Dodd said he wants to add his bill to the housing measure set for a vote Tuesday, but it is up against steep odds.

Bush has been cool to the idea of a big federal housing rescue. “The temptation of Washington is to say that anything short of a massive government intervention in the housing market amounts to inaction,” he said recently. “I strongly disagree with that sentiment.”

Rep. Tim Walberg, R-Mich., whose state ranks among the top 10 for mortgage foreclosures, according to the research firm RealtyTrac, Inc., said he had high turnout for two foreclosure seminars he held in his district over the break. But he added that Congress should be cautious about federal intervention.

“The bottom line is we don’t think the government should get in using taxpayers’ dollars to bail a large number of people out for decisions that they made on their own and contracts that they signed,” Walberg said.

Despite the fact that the FHA has no official credit score requirements more and more banks have recently decided to “just say no” to FHA applicants with FICO scores below 580. That means it is more crucial than ever that potential borrowers stay current on debts and obligations.

In some cases work must be done to improve credit scores. We provide some advice on how to do that and work with experts on the subject as well. Contact us if you have questions about that.

An interesting (though not completely accurate) article about FHA loans came out in the LA Times the other day. Here is an excerpt related to FHA accepting low credit scores:

The agency takes your credit history into account but is willing to consider “cry letters” explaining the negatives on your credit report, Lazerson said. If your credit woes were caused by reasonable, one-time events — such as a divorce, medical problem or a temporary job loss — it won’t necessarily disqualify a borrower, he said. However, people with recent bankruptcies or who can’t verify their incomes are unlikely to qualify for an FHA loan.

There was a good article on the current troubles the US economy is having over in the Wall Street Journal the other day. It said this about the role FHA could play in the future:

Another proposed Bush administration regulatory change involves the Federal Housing Administration. The FHA, which insures mortgages, is developing a plan to allow more distressed homeowners to qualify for government-backed loans. That’s important because many borrowers are having a hard time refinancing amid lender worry about potential losses. Government insurance may give lenders more confidence to refinance financially troubled borrowers.

There was a good article in the San Diego Union Tribune recently on the resurgence of the FHA in the wake of the subprime mortgage meltdown. Here is an excerpt:

Lenders say the Federal Housing Administration is poised to resume its role as a major player in the U.S. mortgage market by coming to the aid of tens of thousands of distressed borrowers who could face foreclosure in the months ahead.

That’s because new lending limits approved by Congress will allow FHA-insured loans to be issued in high-cost markets such as San Diego at favorable terms, said Allen Jones, Bank of America’s government lending executive.

“From Bank of America’s perspective, we are very excited about the prospects of a renaissance for the FHA,” he said. “(The) FHA is a port in the storm for lenders, without a doubt.”

Recent, widespread loan failures have made credit so tight that many distressed borrowers are unable to refinance their loans. An estimated 1.8 million adjustable subprime mortgages are expected to reset at higher rates nationwide through 2009.

Jones said the FHA is coming to the rescue by bringing liquidity to lending institutions.

The agency was created in 1934 to provide long-term mortgages and put moderate-income Americans into homeownership. It operates entirely from its self-generated income. The loans it insures are known for their flexible underwriting guidelines.

FHA loans typically require small cash investments, and there is flexibility in calculating household income and payment ratios. After World War II, FHA programs helped finance homes for thousands of returning veterans.

Jones links the diminished role of the FHA in recent decades to the increasingly loose underwriting standards that preceded the recent mortgage market meltdown.

“As we entered the 2000s, you saw many players get into the mortgage business as properties appreciated,” he said. “(The) FHA became less relevant because these fast-and-easy loan products were available.”

Background: Once widely used, Federal Housing Administration-insured home loans have been squeezed out of costly real estate markets because of relatively low lending limits.

What’s happening: With limits now rising, some lenders predict a comeback for the FHA. In San Diego County, the FHA loan limit is rising to $697,500. Fannie Mae and Freddie Mac are raising their “conforming” loan limits to the same level. However, some lenders say FHA loans have favorable terms that will make them a better deal for consumers.

The future: If Congress doesn’t act, the new loan limits for FHA, Fannie Mae and Freddie Mac will expire at the end of the year.

Here is an interesting excerpt from a recent article over a MSNBC.com:

Bove said he believes Rep. Barney Frank [D-Mass.] is on the right track by proposing that the government set aside $15 billion to $20 billion to purchase whole loan mortgages from banks off their balance sheets and have those loans held temporarily by agencies such as the FHA. That would allow the government to refinance the borrower into a fixed-rate FHA loan or something similar.

If you want to resolve this issue, you need to keep people in their houses, which you cant do by giving them a rule, Bove said.

Despite Congressman Franks best efforts to figure out a way to provide a bailout that doesnt cost the government a load of money, Bove said he doesnt see any way to avoid that.

Franks is one of a handful of proposals for dealing with the crisis. The plan introduced by Senator Christopher Dodd [D-Conn.], chairman of the Senate Banking Committee, resembles a program used during the Great Depression that allows for a government facility to buy loans from banks once their value has been written down to an FHA qualifying level, and, in return, issuing a government-insured bond that would correspond to the homes appraised value.

Congressmen Frank and Dodd have a plan to use FHA to further help distressed homeowners. Here is an excerpt from a recent Reuters article on the subject:

Under the proposed program, a lender or mortgage holder which agrees to reduce the principal of a troubled loan could get a payment from the proceeds of a new FHA-insured loan, if the restructured loan would result in terms the borrower could reasonably be expected to pay, Frank said.

The original lender or mortgage holder would get a cash payment and no further exposure to the borrower, he said.

Borrowers or loan servicers could contact an FHA-approved lender, which would determine the size of a loan that would fit the program and the borrower’s ability to repay.

“If the current lender or mortgage holder agrees to a write-down that is sufficient to meet the requirements of the program and make the new loan affordable, the FHA-lender will pay off the discounted existing mortgage,” he said.

A recent story from the AP reported that the number of homes becoming delinquent on mortgage payments in February was up dramatically when compared to the same period last year. In addition, home repossessions more than double year on year. Here is an excerpt:

LOS ANGELES (AP) — Nearly 60 percent more U.S. homes faced foreclosure in February than in the same month last year, with Nevada, California and Florida showing the highest foreclosure rates, a research firm said.

A total of 223,651 homes across the nation received at least one notice from lenders last month related to overdue payments, up 59.8 percent from 139,922 a year earlier, according to Irvine, Calif.-based RealtyTrac Inc.

Nearly half of the homes on the most recent list had slipped into default for the first time.

Nevada had the nation’s highest foreclosure rate, with one in every 165 households receiving at least one foreclosure-related notice. It had 6,167 properties facing foreclosure, a 68 percent increase from a year earlier and up 1 percent from January, RealtyTrac said Wednesday.

Most of the troubled properties were located in California, Florida, Texas, Michigan and Ohio — states where home prices have plunged as the housing boom went bust.

The overall U.S. foreclosure rate last month was one filing for every 557 homes.

February’s total represents a 4 percent dip from January, but the decline was just a seasonal blip, said Rick Sharga, RealtyTrac’s vice president of marketing.

“We seem to be settling in at a new plateau in terms of monthly activity, but it’s a much higher plateau than we were at a year ago,” he said.

February marked the 26th consecutive month with a national year-over-year increase in foreclosure-related filings.

Meanwhile, the number of foreclosed properties that didn’t sell at auction and ended up going back to lenders soared more than 110 percent last month versus February 2007, RealtyTrac said.

Last month, some 46,508 properties were repossessed by lenders, up from 22,114 a year earlier.

In some areas such as Riverside County, east of Los Angeles, the trend was stark.

The county has seen home values plummet since the end of the speculator-driven demand that triggered a boom in home construction, sales and prices.

In February 2007, it had only 65 homes go unsold at auction and returned to a lender. Last month, the total was 1,346.

“You look at that kind of growth and it’s just mind-numbing,” Sharga said.

Los Angeles County saw a similar rate of growth. Some 215 homes went back to the banks in February 2007, compared with 1,670 last month, RealtyTrac said.

The company follows default notices, auction sale notices and bank repossessions. Lenders typically consider borrowers delinquent after they fall three months behind on mortgage payments.

In the 12-month period ended in February, 45 states saw an increase in the number of homes that had received at least one filing.

The latest data suggest many homeowners across the nation continue to struggle with mortgage payments, despite highly publicized efforts by government, financial institutions and consumer advocacy groups to modify loan terms or work out long-term repayment plans for troubled borrowers.

The number of homes facing foreclosure is still a small percentage of all U.S. homes. But the increases are further exacerbating a protracted housing downturn that some economists warn could tip the nation into a recession.

California had the second-highest foreclosure rate, with one in every 242 households receiving a foreclosure-related notice. The state had 53,629 properties on the foreclosure track, the most of any state. The total increased 131 percent from a year earlier but declined 6 percent from the previous month.

In Florida, 32,447 homes reporting at least one filing, up more than 69 percent from February last year and up more than 7 percent from January.

Rounding out the top 10 states with the highest foreclosure rates were Arizona, Colorado, Michigan, Ohio, Georgia, Indiana and Tennessee

CNNMoney is reporting that the FHA reform bill that has been kicking around Congress since last fall might be ready to pass the senate and House by April. This would make permanent some of the FHA reforms that the economic stimuls package put into place through the end of 2008. Here is some of that article:

NEW YORK (CNNMoney.com) — By early April, both chambers of Congress are likely to tie the bow on a bill that would expand the reach of the Federal Housing Administration (FHA), which aims to provide safe loan alternatives to subprime mortgages and make homeownership more accessible.

Different versions of the FHA modernization bill passed in the House and the Senate last year, and both Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and House Financial Services Chairman Barney Frank (D-Mass.) said last week that the differences between the chambers could be resolved in short order.

“I think we are fairly close to having an FHA reform bill that we will be able to adopt very quickly,” said Dodd on the Senate floor last week.

The FHA program is intended for mortgage borrowers with weak credit or little or no cash who may not be able to get an affordable mortgage elsewhere.

Borrowers get FHA loans from a private lender just as they would any other mortgage. But they pay a small premium to the FHA every month.

The FHA, in turn, uses those premiums to cover the lender in the event of foreclosure and requires lenders to pursue viable ways to help borrowers avoid foreclosure if they become delinquent. That gives borrowers a better chance of keeping their homes should they fall on hard times. If a lender does have to foreclose, the FHA will pay the lender the unpaid principal on the loan, foregone interest and a portion of the foreclosure costs.

FHA loans typically have better rates than other subprime mortgages and don’t carry prepayment penalties.

And since most FHA mortgages are 30-year fixed rate loans, the lender won’t make the loan unless he has proof the borrower will be able to make the monthly payments. One of the reasons for the subprime mess is that lenders didn’t require proof that borrowers could make their payments or only required that they could make the payments at the low initial rate of an adjustable-rate mortgage (ARM).

Taxpayer dollars don’t directly support the FHA loan insurance program - the premiums paid by homeowners with FHA loans do. But taxpayers could end up footing the bill if too many FHA loans go south.

Lawmakers have been working on legislation to reform the FHA to modernize its standards so that they reflect changes to the housing market in the past 30 years. Among the changes on tap, lawmakers will:

Permanently raise loan limits. The economic stimulus bill passed in February temporarily increased the limit on loans eligible to be FHA-insured. The ceiling until Dec. 31, 2008 is now $729,750, up from the normal $362,790 for single-family homes. Those are the ceilings for high-cost areas. The ceiling is lower in low-cost housing markets.

Reduce down payment requirements. Homeowners would no longer be required to have 3% equity or the cash equivalent to get an FHA-insured loan. The House bill would allow borrowers to get an FHA-insured loan with 0% down if they can show they can afford the mortgage payments. The Senate bill requires 1.5%.

Make it easier for borrowers in high-cost loans to refinance. The House bill would let some homeowners in default or at risk of default refinance into an FHA-insured loan.

The changes to the FHA are intended modernize the loan program, which, like a lot of low- and middle-income people, had essentially been priced out of many housing markets. In 2005, there were roughly 5,000 FHA loans made, down from 109,000 in 2000.

“There’s been a desire to push FHA in the market and make it a much more viable product, especially in high-cost markets,” said Janis Bowdler, a senior housing policy analyst of National Council of La Raza, a Latino civil rights and advocacy group.

While FHA loans are intended to help low- and moderate-income families who may not have any other loan options available, anyone can get an FHA-insured loan if they meet the eligibility requirements. But for those who are capable of putting down 20% on a home and have very good credit, they might find they get a better deal going with another type of mortgage product for which they don’t have to pay insurance premiums, Bowdler said.

FHA modernization is a welcome move by politicians and community advocates alike. But Dodd, Bowdler and others caution that reform is not the last word on easing the strains from the subprime crisis.

Said Bowdler, “My concern is that this will be seen as a panacea to the current foreclosure crisis. It’s really not. It’s one good tool going forward.”

See here to check the loan limits in your county.

Ben Bernanke continues to beat the FHA reform drum. Here are some excerpts from an AP article recapping recent comments he made is Florida:

WASHINGTON - Federal Reserve Chairman Ben Bernanke called Tuesday for additional action to prevent more distressed homeowners from falling into foreclosure.

“This situation calls for a vigorous response,” Bernanke said in a speech to a banking group meeting in Orlando, Fla.

Even with some relief efforts under way by industry and government, foreclosures and late payments on home mortgages are likely to rise “for a while longer,” Bernanke warned.

Rising foreclosures threaten to worsen the problems in the housing market and for the national economy, which many fear is on the verge of a recession or in one already.

“Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods and the nation as a whole,” Bernanke said. “Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should, be done,” the Fed chief said.

On Capitol Hill, a number of measures have been offered to help stressed homeowners.

Overhauling the Depression-era Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, could help, Bernanke said. He also called for strengthened supervision of mortgage giants Fannie Mae and Freddie Mac.

Bernanke, who last week signaled that the Fed stands ready to lower a key interest rate again, did not talk interest rate policy in his speech or in a brief question-and-answer session afterward. The Fed, which has been slicing rates since September to help the economy, is expect to reduce them again on March 18, the Fed’s next meeting.

Another interesting article came out recently over at CNNMoney.com. It highlights comments from officials at the Fed. Here are some highlights:

NEW YORK (CNNMoney.com) — Two Federal Reserve officials said Friday that the housing market could damage the economy even more severely than it has already if measures are not taken to correct it.

In speeches at the U.S. Monetary Policy Forum in New York, Eric Rosengren, president of the Federal Reserve Bank of Boston, and Frederic Mishkin, a member of the Federal Reserve board of governors, spoke about the critical nature of the housing market crisis.

“Further declines in housing prices could depress residential investment, reduce consumer spending, generate elevated foreclosures, and contribute to financial instability,” said Rosengren.

“Taking appropriate monetary, regulatory, and fiscal actions to mitigate this risk seems prudent.”

As mortgage rates continue to decline, he said that foreclosures and unemployment should come down with them. He also said that as borrowers shy away from risky subprime loans, they should instead look into FHA loans - home mortgages that allows for a purchase or refinance with a low down payment.

“Examining how FHA programs could continue to be modernized and streamlined and become a more viable choice for borrowers may be an important mitigant for housing problems,” said Rosengren