A New Market For FHA Mortgages?
November 23rd, 2009
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There’s been a touch of good news of late on the real estate front, it appears that some level of stability has begun to creep into some local markets.
It’s not wise to overstate what’s happening, but something is going on: The National Association of Realtors says that 30 of 153 metro areas actually saw prices rise in the third quarter.
It would surely be better if prices were falling in only 30 areas, but for the moment what we have from NAR and several other sources looks like good news.
That said, we also have another issues to consider: The government says that as of October some 3.2 million borrowers are at least 60 days late on their mortgages.
This is a huge number but one which is likely understated because it does not count borrowers who are now current but have lost their jobs.
It’s difficult to imagine much price improvement with so many borrowers in trouble. This raises the idea that as much as the FHA mortgage program has grown during the past year, it could grow even further in the coming months.
The Threat of Rising Monthly Costs
There are millions of toxic loans which remain outstanding, loans which in many cases are “exploding” ARMs that have yet to have payments re-cast, a term which means that either the “start” period for the loan has ended or that the loan balance has increased to a point where the loan contract requires re-casting.
What happens when toxic loans are re-cast? Monthly payments rise, often by huge amounts.
Virtually every toxic loan borrower is a solid candidate for FHA refinancing. FHA loans provide the stability that’s entirely missing from option ARMs, they do not have prepayment fees, and monthly payments are either fixed or rise and fall on a gradual basis for adjustable FHA mortgage products.
To be sure, many borrowers with toxic loans have already refinanced into FHA products — HUD reports that during the last fiscal year some 835,000 owners refinanced with FHA mortgages.
New FHA Borrowers?
But what about the rest of our troubled borrowers — or most of the rest. The reality is that many will not qualify for FHA loans because they have insufficient equity or — being 60 days or more late — they have woeful credit.
The conflict here is how to refinance people who in many cases are unable to qualify for the FHA program.
The grim reality is that many of our 3.2 million delinquent borrowers simply lack the credit and equity needed to refinance. A large percentage will lose their homes during the coming year — just look at recent foreclosure reports.
What can be done? Basically every lender should be sending a letter to option ARM borrowers — whether current or not — explaining that the FHA program may be able to help, especially in those cases where the borrower is making full and timely payment. Such an outreach won’t save everyone from foreclosure — but every home that can be saved is a “win” for our economy and our communities.
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