The FHASecure program announced by President Bush has a number of important features which need to be looked at with some care.
First, HUD says that “FHASecure, like all FHA products, will be underwritten to ensure the borrowers have the ability to repay the loan, will require escrow for taxes and insurance, and will continue to offer unprecedented foreclosure prevention assistance. The FHA has never permitted and will not include pre-payment penalties or teaser rates that are common in exotic mortgages and have caused much of the current market troubles.”This is a very important statement because the FHA program is an insurance plan funded with borrower premiums. Any effort to change program requirements could wreck the insurance funds derived from the FHA program and force taxpayers to make-up losses. FHA solvency is a key issue with fiscal conservatives in Washington.
Second, HUD says the FHASecure program will continue baseline FHA borrower requirements, to wit:
A history of on-time mortgage payments before the borrower’s teaser rates expired and loans reset. This means that those who have missed payments because of a job loss, illness or accident will not qualify for the FHASecure program unless the payments were late or not made after loans re-set.
Interest rates must have or will reset between June 2005 and December 2009. Notice that the program anticipates a need for FHASecure that will continue for at least another two years. In other words, there are a ton of loan re-sets in the pipeline that have not yet become toxic — but will.
Three percent cash or equity in the home. A key aspect the FHA modernization proposals has been to drop the downpayment requirement to zero. The President’s program does not take on that issue because it would require congressional approval and such approval is not assured.
Many borrowers with toxic loans will not be able to meet the 3 percent standard because they bought with little or nothing down. As home values have fallen in many areas, such borrowers have less than 3 percent equity and many have loan balances that are larger than property values. Moreover, those with negative amortization loans plus lower home values are likely to also be up-side down on their mortgages.
To determine home values FHA requires real appraisals, not the computerized or drive-by valuations often accepted by private-sector lenders.
A sustained history of employment and sufficient income to make the mortgage payment. In other words, the FHA will require full-documentation loans not “stated-income” loan applications. This will be a problem for those who over-estimated income when using a stated-income application and now cannot verify such dollars.