Will The FHASecure Program Really Help Those Facing Foreclosure?

by Peter G. Miller
August 31st, 2007

The FHASecure program announced by President Bush has a number of important features which need to be looked at with some care.

First, HUD says that “FHASecure, like all FHA products, will be underwritten to ensure the borrowers have the ability to repay the loan, will require escrow for taxes and insurance, and will continue to offer unprecedented foreclosure prevention assistance. The FHA has never permitted and will not include pre-payment penalties or teaser rates that are common in exotic mortgages and have caused much of the current market troubles.”

This is a very important statement because the FHA program is an insurance plan funded with borrower premiums. Any effort to change program requirements could wreck the insurance funds derived from the FHA program and force taxpayers to make-up losses. FHA solvency is a key issue with fiscal conservatives in Washington.

Second, HUD says the FHASecure program will continue baseline FHA borrower requirements, to wit:

A history of on-time mortgage payments before the borrower’s teaser rates expired and loans reset. This means that those who have missed payments because of a job loss, illness or accident will not qualify for the FHASecure program unless the payments were late or not made after loans re-set.

Interest rates must have or will reset between June 2005 and December 2009. Notice that the program anticipates a need for FHASecure that will continue for at least another two years. In other words, there are a ton of loan re-sets in the pipeline that have not yet become toxic — but will.

Three percent cash or equity in the home. A key aspect the FHA modernization proposals has been to drop the downpayment requirement to zero. The President’s program does not take on that issue because it would require congressional approval and such approval is not assured.

Many borrowers with toxic loans will not be able to meet the 3 percent standard because they bought with little or nothing down. As home values have fallen in many areas, such borrowers have less than 3 percent equity and many have loan balances that are larger than property values. Moreover, those with negative amortization loans plus lower home values are likely to also be up-side down on their mortgages.

To determine home values FHA requires real appraisals, not the computerized or drive-by valuations often accepted by private-sector lenders.

A sustained history of employment and sufficient income to make the mortgage payment. In other words, the FHA will require full-documentation loans not “stated-income” loan applications. This will be a problem for those who over-estimated income when using a stated-income application and now cannot verify such dollars.

What is different under FHASecure from the regular FHA program? Only one point but it’s important: FHA is saying that underwriters may make an “exception” for late payments and no payments which are the result or coincidental with loan re-sets. Such payment failures would normally doom a loan application or force a borrower to use subprime financing at steep rates.

Is the FHASecure program good or bad? It is — to the extent we have information — a well-reasoned, constructive and important effort to help homeowners facing foreclosure.
It keeps in place baseline FHA underwriting standards which means that only the most credit-worthy borrowers will be able to refinance under the FHASecure plan.

Also, it avoids political land mines and recognizes that toxic loans are a substantial threat to homeowners nationwide — and to the national economy.

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This entry was posted on Friday, August 31st, 2007 at 9:32 am and is filed under , . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

13 Responses to “Will The FHASecure Program Really Help Those Facing Foreclosure?”

  1. D Corwyn Jackson Says:

    No Bail Out For Lenders or Investors…

    A helping hand is needed for the low-income borrowers who are currently facing foreclosure as a direct result of the Subprime Lenders and Predatory Brokers who assited with providing these loan products to homeowners..knowing that they could not afford their new mortgages….

    Thanks goes to President Bush for stepping up to the plate to assist these Homeowners via FHA’s new program..

    D.Corwyn Jackson
    National Foreclosure Prevention Consultant

  2. Peter G. Miller Says:

    Not so quick.

    We would not have this mess had federal regulators moved several years ago to stop lenders from issuing option ARMs, interest-only loans and stated income loan applications. The Fed had such power under HOEPA and did not use it.

    The FHA ARM program would be better for consumers had the annual and lifetime caps not been raised from 1/5 to 2/6. The VA program remains at 1/5.

    The government could have stopped lenders from changing caps on private sector loans from 2/6 to 2/5/6 — the middle cap being for the first re-set. Of course borrowers will have problems if the first re-set doubles or triples monthly payments, as a senior FHA spokesman said yesterday.

    The new FHA effort should be applauded — but it should also be seen in perspective.

    Peter

  3. MARIO R DAGULO Says:

    I am in foreclosure as we speak. Prior to the foreclosure proceeding my wife and I had excellent credit.

    How do I qualify for the FHAsecure program. Is there a phone number, website I can go to to apply?

    Thank You
    Mario R. Dagulo

  4. Peter G. Miller Says:

    The FHA should be out with loan guidelines immediately (I expected them yesterday, September 4th).

    The loan should be available from any lender that handles FHA financing, which means most lenders. Shop around for rates — the product is the same no matter which lender you use.

  5. jbudet Says:

    Are the loan limits on the new FHASecure the same as existing FHA loans? If this is the case most California borrowers will not qualify. Is there going to be an income cap, or loan cap?

  6. Peter G. Miller Says:

    You’re right that the new FHASecure program will not help all troubled borrowers.

    The program uses the general FHA loans limits. This means many borrowers in high-cost areas such as California, Boston, New York and Washington will not be able to finance big loans. However, not all borrowers in these areas have huge mortgages so the program will surely help some with toxic mortgages.

    The income ratio under the program will be 31/43 — the general FHA standard.

  7. Tammy Says:

    In response to jbudet — Keep your eye on the announcements coming out of FHA/HUD in the next few weeks, I have a hunch that the loan limits in California will be going up for FHA loans. IF this happens, it means that many more people who live in California (and other high-cost-places) will be eligible for the FHA Secure program.

  8. Mortgage vet Says:

    “We would not have this mess had federal regulators moved several years ago to stop lenders from issuing option ARMs, interest-only loans and stated income loan applications. The Fed had such power under HOEPA and did not use it.”

    This is typical of the drive-by journalistic mentality of the uniformed writer. To say that all of these affordability products are bad and should have been stopped or eliminated is naive at best and probably better defined as ignorant.

    And just so you know, HOEPA does not restrict these products from being offered.

  9. Peter G. Miller Says:

    Hi –

    A mortgage vet would surely know that notification standards for HOEPA do not apply to most loans, much less toxic financing. As the FTC says, HOEPA “rules do not cover loans to buy or build your home, reverse mortgages or home equity lines of credit.” This lack of regulatory oversight is, of course, the heart of the problem.

    A mortgage vet would also know that under HOEPA’s Section 129(I), the Federal Reserve has expansive powers to deal with unfair and deceptive acts or practices (UDAP) regarding ALL loans. As Michael Calhoun, President of the Center for Responsible Lending, says, “the Board has not used this authority.”

    No one says all “affordability” products are bad, merely that they are a woeful idea for very large numbers of borrowers, lenders and investors. Combine toxic loans with the lack of a fiduciary obligation on the part of loan officers to get the best possible terms for borrowers and you wind up with lots of foreclosures and lender losses.

  10. Jen Jones Says:

    Mr. Miller, so many of these homeowners in trouble bought their homes with 0 down and refinanced over and over cashing out all of their equity year after year. Will they be eligible for the FHA Secure program or any other bail-out assistance? Unfortunately this scenario applies to such a huge number of these people in trouble. If you purchased your home 10 years ago for $80k and you now owe $300k it’s important to note that you made a profit of approximately $220k that you spent the way you saw fit. I don’t think you can be considered a “victim” of the subprime lending industry. Sub-prime lenders made alot of money, true……but so did the borrowers who cashed out over and over and over.

    It’s also important to note that every one of these borrowers did, in fact have a choice of an adjustable or a fixed rate loan. The difference was the rate and how much house they could “afford”. 5.5% was the adjustable or 7.25% fixed. The majority of these borrowers wanted a conforming rate even though they were non-conforming borrowers. The got that rate but had to sacrifice their better judgement to get it.

  11. Kat Korac Says:

    My home that is in danger of foreclosure due to an adjusted ARM that just happened raising my payment 218.00 more per month. The home is a rental property in Ohio, and I live in TN now. Can I get help with an FHA Secure on a rented property.

    Kat

  12. nardi Says:

    I am currently buying out my ex from our marital residence. However, due to him not paying the mortgage my credit has suffered badly. we have a separation agremnt that he agreed to be responsible for the paymnts. Can I still qualify for the fha secure loan? we had to refinance due to the two yr interest only arm that we had on our hse, which made our paymnt increased from $1500 to $2100.

  13. Tom Potter Says:

    Sub prime loans were helpful to millions of Americans during their infancy (1985-2003). It’s the combination of boutique loans; (interest only, Option ARMS) and the degradation of underwriting standards in name of volume that caused massive defaults. Anytime a borrower with a 580 middle credit score can buy a house with a loan or combination of loans that equal 100%, a 6% seller contribution and pay no interest for the first 5 years of the loan or worse yet, add interest to the balance, you’re going to have issues.
    Unfortunately, the new American way was “Either you give me what I want, and give it to me now (because I’m entitled to it),or someone else will.” Face it, we’re reaping what was sown.

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