How Many Subprime Borrowers Can Switch To FHA?

by Peter G. Miller
August 30th, 2007

Calculated Risk — a cleaver and readable blog that covers financial and economic matters — reports that a Bank of America research note has looked at what can be done to bail out subprime borrowers. The answer, says Calculated Risk, is that:

“FHA and Fannie Mae’s “Expanded Approval” program (EA, its existing program for “near prime”) are the only realistic options, given pricing structures,” says Calculated Risk. “BoA estimates that approximately 18% of outstanding subprime ARM borrowers could qualify for an FHA refi (on both credit guidelines and rate reduction), and approximately 36% could qualify for Fannie Mae’s EA. (That’s best understood as 36% qualifying for either FHA or EA, not a total of 54%.) The larger bucket of loans qualifying for EA is mostly a matter of the larger GSE maximum loan amount compared to the FHA maximum, as well as a slice of the highest-credit class for which EA, at least in theory, offers 100% financing in contrast to FHA’s 97% maximum.”

It’s absolutely amazing that 3 percent equity is a bar to refinancing for nearly a fifth of all subprime borrowers — those who cannot use the FHA program because they lack minimum equity.

However, I’m not sure that even those with sufficent credit and equity to qualify for the Fannie Mae program will make it. The problem? A lot of toxic loans were funded on the basis of “stated-income” mortgage applications — applications where people were allowed to “estimate” their income and the lender never verified the information.

Fannie Mae is going to demand income verifications — and they should, otherwise their loan portfolio will be damaged and their security guarantees will be stretched.

Thanks to Calculated Risk for a great posting.

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