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“New” Initiatives From The FHA?

by Peter G. Miller
August 30th, 2010

Over the weekend there were big doings in Washington. Duel demonstrations on the anniversary of the “I have a Dream” speech by Dr. Martin Luther King showcased many of the divisions which continue to separate our political thinking.

Meanwhile, on CNN’s “State of the Nation,” HUD Secretary Shaun Donovan told interviewer Candy Crowley that “we’re going to be rolling out an FHA mortgage refinancing effort to help borrowers who are under water in their homes get above water. And second, we’re launching an emergency homeowners’ loan program for unemployed borrowers to be able to stay in their homes.”

This is all good stuff. It’s also all old stuff and unworkable stuff.

The idea of using an FHA mortgage to help underwater conventional borrowers dates back to President Bush. As he explained in August 2007, “in the coming days the FHA will launch a new program called FHA-Secure. This program will allow American homeowners who have got good credit history but cannot afford their current payments to refinance into FHA-insured mortgages. This means that many families who are struggling now will be able to refinance their loans, meet their monthly payments and keep their homes. In other words, we’re going to start reaching out and making sure people know that this option is available to them so they can stay in their homes.”

Actually, FHASecure has been over and done for some time. It managed to refinance 4,110 delinquent conventional mortgages with new FHA financing. Now, according to RealtyTrac, we have more than 300,000 foreclosure filings per month so it’s hard to see the FHASecure effort as anything but a flop.

More recently, we have the August 6th announcement of a new FHA loan for underwater borrowers, the short refi. As our Gina Pogel wonderfully explains, this program will go nowhere because of the way it’s designed.

However, if we take the Secretary literally — “we’re going to be rolling out an FHA refinancing effort to help borrowers who are under water in their homes get above water” — then we’re in a fresh world of huh? How is that going to happen?

Underwater

Let us give Sec. Donovan credit for being enthusiastic, however there are very few politically-acceptable options to help borrowers “get their homes above water.”

An “underwater” borrower is someone with a loan balance that is larger than the value of the property. Thus, if Smith bought for $300,000 with 5 percent down he took out a $270,000 mortgage. If the property is now worth $250,000 the loan amount is less than the value of the property.

We could “help” Smith by giving him $20,000 to reduce his mortgage balance, but that would be very irritating to the people who are making their payments and put more down in the first place. No less important it’s possible that the value of Smith’s home will continue to plummet.

The real problem here is that while Smith may owe more than the house is worth, if he is making his payments then he has a “performing” loan. For lenders there is no issue. Smith borrowed money he is now repaying which is what he should be doing.

Here’s an idea: Mr. Secretary the housing market seemed to have hit bottom and had even begun to rise in some areas as a result of the tax credit for first-time buyers. Alas, qualifying contracts under the program ended April 30th. Instead of doing something complex, let’s go back to a program that worked and had wide public support.

Let’s re-start the first-time homebuyer tax credit. If demand increases, prices will rise and Smith will be either less underwater or not underwater at all.

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This entry was posted on Monday, August 30th, 2010 at 12:31 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

4 Responses to ““New” Initiatives From The FHA?”

  1. CAS Says:

    Your example of the “Smiths” who are only 20k underwater is a joke! 20k is nothing to worry about. There are areas were it is much much worse. I bought a 440k home in Patterson Ca with a 360k mortgage that is now worth 160k. The only way you get a decline like that is thru a massive amount of mortgage fraud perpetrated by the banks and real estate industries. I’m not going to pay for their greed and mistakes. Either lower the principal or let me walk away without penalty.

  2. Peter G. Miller Says:

    CAS –

    An example, merely an example.

    Certainly in hard-hit foreclosure centers the losses will be substantially greater than $20,000 for many borrowers.

    Let’s say that the value of the property doubled. How many borrowers would then be willing to give lenders additional money? I don’t recall too many examples of such generosity when prices were rising.

  3. Philip McGreevy Says:

    If the situation is a hardship, loss of income etc
    and owners can no longer afford payments at purchased amount and interest rate.

    Then if the current owners can qualify for short amount[near market] why sell it to another party for short amount.

    The program also has in place if the owners sell in future to split equity 50/50 with lender.

    Yes Peter your last paragraph makes a point with a ‘Live and let Die Attitude’

    But you could also say:
    ‘What’s good for the goose is good for the gander’ in this situation.

    And yes for those who can afford their home and have no need to sell it may ‘seem’ like a hard pill to swallow watching others get bailed out.

    But in the end it might keep their neighborhood from being plagued with foreclosures, unkempt homes and put many Americans back in play to help with overall financial crisis.

    Then again you perception does not include those who accurately asses:

    ‘For the Grace of God Go I’ and have no disdain for those in need no matter how they got there, knowing most likely only a minority purposefully abused then or are now abusing system.

  4. Peter G. Miller Says:

    Phil –

    I agree with the idea that helping neighbors avoid foreclosure is good for you and me. That said, not being among the rich and famous, I would also like lower monthly costs if I could get them — and I suspect most people feel the same way.

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