FHA Mortgages & Cure Rates

by Peter G. Miller
October 14th, 2009

There has been a big to-do during the past week with the announcement that more than 500,000 trial loan modifications in progress under the Making Home Affordable program.

This is good stuff and a huge change from what we had before. What we had before 949 applications under the Hope for Homeowners Program and ONE mortgage approval. As to the FHASecure program, it allowed just 3,794 delinquent conventional borrowers to refinance with FHA loans in fiscal 2008.

In contrast, the Obama Administration reports that 2,484,783 borrowers have sought information under the Home Affordable Modification Program (HAMP) through the end of September. Of this number, 757,955 were offered three-month trial modification and 487,081 trial modifications have begun. If the borrower makes three lower payments during the trial period then the loan is permanently changed to that lower rate and hopefully the home is saved from foreclosure.

Plainly the Administration will reach its goal of 500,000 trial modifications by November 1st, it likely has already done so. This is good for the country and good for every homeowner who can avoid foreclosure.

That said, there are two considerations which should be mentioned.

First, the experience with loan modifications is not good. According to figures from the Office of the Comptroller of the Currency, after eight months nearly 60 percent of all borrowers have re-defaulted.

“After three months,” says Comptroller John C. Dugan, “nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent.”

If we apply this percentage to the HAMP program than about 200,000 borrowers will be fully and finally saved from foreclosure and about 300,000 borrowers will try and fail. These results, which not what anyone really wants, are vastly better than the Bush Administration’s FHASecure effort and the Help For Homeowners program.

Second, if the government wants to know how to do loan modifications it should speak with the FHA.

FHA mortgages, as critics note, now have high delinquency rates, meaning that someone has missed one or more payments. What critics do not explain or do not know about are FHA “cure rates;” that is, the percentage of delinquent loans which are saved from foreclosure.

And how high is that rate? Get this: According to the 2008 FHA annual report, the latest available, “HUD-held loans are placed under a workout plan when delinquent. Delinquent loans that do not have a workout plan are recommended for foreclosure, put in the mortgage sale, or referred to the Departmental Enforcement Center for further action. In fiscal year 2008, 80 percent of the HUD-held loans that are 90 or more days delinquent were brought under control.”

An 80 percent success rate! For borrowers 90 days overdue! Not just 30 or 60 days. This is why FHA mortgage loans have both high delinquency rates and foreclosure rates below prime. And this is also why the federal mortgage modification plan should aim higher.

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