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HUD Redefines FHASecure — Again

by Peter G. Miller
July 7th, 2008

Once again, HUD has redefined the FHASecure program to assure that few borrowers facing for foreclosure will actually have access to the program.

As HUD explains, “FHA has not changed its underwriting guidelines, but rather its eligibility criteria.”

Right. As the lawyers say, this is a distinction without a difference.

Forget about saving families from foreclosure. HUD’s real goal with FHASecure is to have as many people as possible paying risk-based premiums — this raises additional dollars for HUD and the Treasury Department and gets rid of risky borrowers who cannot afford steep premium costs.

The newly-minted and freshly-laundered definition of the FHASecure program is below. I have noted in bold the more-interesting elements of a program introduced to save borrowers from foreclosure.

Question: What is the FHASecure refinance program?

Answer: FHASecure is a refinancing option that gives homeowners with non-FHA adjustable rate mortgages (ARMs), current or delinquent and regardless of reset status, the ability to refinance into a FHA-insured mortgage. With FHASecure, the lender will not automatically disqualify you because you are delinquent on your loan, and the lender may offer you a second mortgage to make up the difference between the value of your property and what you owe.

So long as you are current on your mortgage and have sufficient income to make the mortgage payment, you are eligible for an FHASecure refinance. (If you are current on your mortgage why do you not qualify for the regular FHA program?) If you are delinquent, the default must have been due to the payment shock of an interest rate reset or, in the case of an Option ARM, the “recasting” of the mortgage to fully amortizing. (The catch here is that most people who are now behind on their mortgage are also behind on other credit debt and thus are excluded from the FHASecure program.)

FHA further modified the FHASecure Program with Mortgagee Letter 08-13 and is expanding FHASecure as follows:

1. To include borrowers delinquent on their non-FHA ARMs due to a rate reset or the occurrence of an extenuating circumstance but experienced no more than two 30-day or one 60-day late payment in the 12 months prior to the rate reset or extenuating circumstance that caused the delinquency; (In a telephone news conference with reporters when the FHASecure program was first introduced, a high-ranking HUD official explained that the program was open to delinquent borrowers regardless of how many payments had been missed — he actually mentioned six or more as an example.) or

2. To include borrowers delinquent on their non-FHA ARMs due to a rate reset or the occurrence of an extenuating circumstance but experienced no more than one 90-day late payment or no more than three 30-day late payments prior to the rate reset or extenuating circumstance that caused the delinquency provided the loan-to-value on the FHA insured first mortgages does not exceed 90 percent.

3. Borrowers delinquent on their interest-only and/or payment option ARMs are not eligible for this expansion: borrowers with these types of mortgages must demonstrate that a rate reset caused the delinquency and that they were making the monthly mortgage payments within the month due during the 6 months prior to the rate reset.

4. For borrowers refinancing delinquent non-FHA ARMs the Up-front mortgage insurance premium (UFMIP) is set at 2.25 percent of the base loan amount (loan amount excluding UFMIP) regardless of the loan-to-value (LTV) ratio. For LTV ratios greater than 95 percent (excluding UFMIP) the Annual premium (collected monthly) is set at .55 percent. (2.25 percent is the highest FHA mortgage insurance premium and much more than the 1.5 percent up-front rate that was in place before risk-based premiums were introduced.)

This mortgagee letter replaces the specific guidance regarding FHASecure issued in Mortgagee Letter 2007-11 and is effective for case numbers assigned on or after July 14, 2008. FHA is implementing the policies in this letter simultaneously with the implementation of risk-based pricing through notice in the Federal Register May 13, 2008. Mortgagees are reminded that the eligibility criteria for delinquent borrowers and new subordinate financing under the FHASecure initiative are temporary and require that the loan application be signed no later than December 31, 2008. Mortgagees are also reminded that FHA has not changed its underwriting guidelines, but rather its eligibility criteria. Existing policies are still applicable, such as those involving bankruptcy. This mortgagee letter also clarifies guidance issued in Mortgagee Letter 2005-43 regarding cash-out refinance transactions.

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