New FHASecure Standards Announced — Is This Real?

HUD has released the announcement below, which suggests a loosening of the credit standards for the FHASecure program.

Or does it?

It says “borrowers with adjustable rate mortgages who were late on two consecutive monthly mortgage payments or at two different times over the previous twelve months. FHA will require a 97 percent loan-to-value (LTV) ratio for these borrowers to refinance, the same LTV as FHA’s current standard.”

And, “borrowers with adjustable rate mortgages who were late on three consecutive monthly mortgage payments or at three different times over the past 12 months. FHA will require a 90 percent LTV ratio for these borrowers to refinance.”

In other words, two late payments and you can qualify for 3 percent down, three late payments and you need 10 percent down.

Many borrowers with toxic loans don’t have three percent equity much less 10 percent. To resolve this problem, HUD says that “lenders may voluntarily write down the outstanding subprime mortgage principal balances to a 97 percent or 90 percent LTV ratio depending on the borrowers’ circumstances.”

In other words, if a lender will graciously agree to eat a loss HUD will step in with a new mortgage.

Does this make sense?

First, the HUD announcement refers to “subprime” mortgages and not all borrowers. Does this mean the program is restricted to subprime borrowers? Surely it is clear by now that borrowers with a range of credit profiles are in trouble and that a foreclosed home lowers local values whether or not a subprime loan was involved.

Second, even if a lender is willing to take a loss and kiss-off part of a loan, it does not mean the value of the property changed. In other words, if Smith has a 100-percent loan on a $300,000 home and lender Jones gives up 5 percent, the remaining loan balance is $285,000. If the value of the property has dropped to $280,000 then the borrower still lacks the equity needed to make FHA refinancing work.

Third, what about other credit issues? HUD says the original FHASecure plan was made available to “creditworthy homeowners.” But, obviously, people who are not making mortgage payments may also be drowning with other bills. If HUD continues to insist on “creditworthy homeowners” with several missed mortgage payments and equity, then few borrowers will qualify under the new standards.

Lastly, of course, we have the usual claim of assistance to vast numbers of borrowers — 500,000 is the latest target number. To date such claims — despite constant repetition — have proven false. Delinquent conventional borrowers who meet FHASecure standards are a rare and vanishing species.

Fourth, notice that HUD is talking about risk-based insurance premiums. Do you think that borrowers with missed mortgage bills will have great credit and get a break on their mortgage insurance premiums?

The release from HUD is below:

BUSH ADMINISTRATION TO EXPAND MORTGAGE HELP FOR STRUGGLING FAMILIES
Expanded FHASecure able to help half a million homeowners stay in their homes by cutting mortgage payments.

WASHINGTON – The Bush Administration today announced additional mortgage assistance for subprime borrowers who are at risk of foreclosure. The plan, which is designed to help address the adverse economic conditions affecting many communities across America, will help break the cycle of house price depreciation that is being caused by an increasing number of foreclosures and the overall contraction in the credit market. Under the new plan, HUD’s Federal Housing Administration (FHA) would have the added flexibility to insure more mortgages, including those for borrowers who were late on a few payments and/or received a voluntary mortgage principal write-down from their lender.

This FHASecure expansion will help more homeowners who are struggling to keep up with mortgage payments on their high-cost subprime loans. With this expansion of FHASecure, the Administration expects about 500,000 families to refinance into prime-rate FHA-insured mortgages in total by the end of this year.

“Our plan will help hundreds of thousands of desperate families who have no place else to turn for safer, lower cost ways to keep their homes,” said Federal Housing Commissioner-Assistant Secretary for Housing Brian D. Montgomery at a hearing of the House Financial Services Committee. “We want to be able to help families who are in the right house, but the wrong mortgage.”

In August 2007, FHA modified its refinancing program to help creditworthy homeowners who missed payments after their teaser rates reset. Now, FHASecure is expanding its eligibility standards. Homeowners who believe they meet this additional eligibility criteria must fall into one of the following categories:

1. Borrowers with adjustable rate mortgages who were late on two consecutive monthly mortgage payments or at two different times over the previous twelve months. FHA will require a 97 percent loan-to-value (LTV) ratio for these borrowers to refinance, the same LTV as FHA’s current standard.

2. Borrowers with adjustable rate mortgages who were late on three consecutive monthly mortgage payments or at three different times over the past 12 months. FHA will require a 90 percent LTV ratio for these borrowers to refinance.

With these new criteria, the expanded FHASecure can help additional borrowers access a more viable refinancing option and will offer lenders an alternative to foreclosing on these individuals. Lenders may voluntarily write down the outstanding subprime mortgage principal balances to a 97 percent or 90 percent LTV ratio depending on the borrowers’ circumstances. FHA will also encourage lenders to make other arrangements, such as subordinate financing, to “fill the gap” between the existing loan balances and the FHA-insurable loan amount. The refinanced loan amount backed by the FHA would be based upon a new appraisal, performed by an FHA-approved appraiser.

FHA will insure new, more affordable mortgages in exchange for this equity cushion, which will protect FHA’s insurance fund, and thus the taxpayer, against risk. Currently, FHA’s insurance fund is self-sustaining, meaning that it requires no appropriation of taxpayer dollars because homeowners pay for the product themselves. Further, any new FHASecure loans will continue to meet FHA’s no-nonsense underwriting standards. Lenders will be required to ensure borrowers have the capacity to repay their mortgages; show a reasonable credit history; employment history; and fully document and verify their incomes.

Like all FHA-insured loans, borrowers will be required to pay upfront and annual premiums on their loans, which directly contribute to the soundness of FHA’s insurance fund and protect taxpayers. FHA will also be simultaneously updating the pricing policy for these premiums. The new policy will base premiums on the individual borrower’s credit risk profile. More than 90 percent of FHA-backed loans are 30-year fixed rate mortgages. Homeowners currently using FHASecure are saving $400 a month on average compared to their previous subprime loans.

“More homeowners continue to turn to FHA to find mortgage terms they can afford. We’re keeping families in their homes while doing what’s in the best interest of future generations who will rely on the safety and soundness of FHA to put a roof over their heads. The modifications to the existing FHASecure product offer a prudent, yet appropriate, way to help more families refinance without putting the government or taxpayers at risk. Consistent with FHA’s historical mission, the changes are designed to help FHA provide additional liquidity and stabilize local real estate markets.”

Since September 2007, FHA has helped pump nearly $68 billion of much-needed mortgage activity into the housing market, $28.5 billion of which was through FHASecure. FHASecure has helped more than 150,000 homeowners who are current or past due on their loans avoid foreclosure, and, with today’s announcement, it is expected to assist 500,000 total families by December 31, 2008.

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