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House bills would hurt FHA borrowers

by Peter G. Miller
May 13th, 2011

Given the substantial drop in home prices seen during the past few years it’s not surprising that the Federal Housing Authority (FHA) program now finds itself with an enlarged supply of foreclosed properties. A new report from HUD shows that as of February the FHA now holds title to 68,801 foreclosed homes. That’s a big number, far higher than the 44,605 properties it held a year earlier.

The growing total of so-called REOs–”real estate owned” by a lender or insurer–suggests that home prices are unlikely to turn around anytime soon, especially in the most hard-hit foreclosure areas. The REO numbers have risen at the very time several bills have passed the House of Representatives which would end current foreclosure prevention programs.

For instance, H.R. 839, the HAMP Termination Act, would end the Making Home Affordable program. To date this program has prevented 586,916 foreclosures. The proposed legislation passed the House by a vote of 252 to 170.

Or, how about HR 836, the Emergency Mortgage Relief Program Termination Act. This legislation would end mortgage assistance for the unemployed. The House vote was 242 to 177 in favor.

The reality is that these bills will never pass the Senate and will be vetoed by the President. They are, in effect, a way to make a statement. So what statement do they make?

Modifications

Loan modification and foreclosure prevention programs have hardly been perfect. The Making Home Affordable program, as an example, not only helped almost 590,000 owners avoid foreclosure, it also failed to help more than 750,000 owners who entered the program but could not successfully complete the three-month trial period.

The catch is that cutting off help to citizens in need, even with programs that are not perfectly successful, ultimately hurts the FHA program. Consider what the FHA does: It’s an insurance program. Individuals who cannot buy with 20 percent down can buy with 3.5 percent percent down under FHA guidelines, if they meet FHA loan requirements.

When a lender makes an FHA loan it has 100 percent protection against losses. The reason is that in the event of default FHA insurance kicks in to protect the investor. The money paid to lenders comes from the premiums collected from FHA borrowers. There is no cost to the taxpayer.

So, if we cut loan modification programs we will increase the number of homes that go to foreclosure. This will help push down local home prices. The more homes are underwater the bigger the individual claims against the FHA. If it ever happened that the House termination bills became law then home prices would fall further (because the supply of foreclosed homes would increase) and FHA mortgage rates would rise (because all mortgages would be seen as more risky). None of this is good for the housing market.

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