Federal Housing Adminstration to help refi at-risk loans

Friday, August 31st, 2007

Noelle Knox
USA Today

A sign showing a foreclosed house is seen in Glendale, Calif. Foreclosure filings rose 9% from June to July, a research firm said last Tuesday. The figure is the latest measure of the ailing housing market, which has seen defaults and foreclosures soar as financially strapped borrowers have failed to make payments or find buyers.

Some homeowners with risky “subprime” adjustable-rate mortgages will be able to refinance before they lose their home to foreclosure, with the help of steps President Bush will announce Friday, senior administration officials said Thursday night.

An estimated 80,000 homeowners with bruised credit and subprime ARMs they can no longer afford will be able to refinance loans, which the Federal Housing Administration (FHA) would insure.

The move marks a historic expansion of the role of the FHA, a Depression-era agency that has traditionally served low- and moderate-income families and first-time buyers, but not delinquent borrowers. Nearly 16% of subprime borrowers are behind on their ARMs, and an estimated 2 million subprime ARMs totaling about $600 billion will reset to higher rates through the end of next year.

To qualify for the new benefit, homeowners would have to prove they paid their loan on time before it reset to a higher rate and must have at least 3% equity in the home.

The program, which doesn’t need congressional approval, should take effect early next year.

Under current rules, the maximum loan the FHA can guarantee is $202,000 in most states and up to $362,000 in high-cost states such as California and New York.

The officials said Bush will also call on Congress to pass his proposal to reform the FHA, in part by raising those loan limits to $262,000 in most states and $417,000 in pricier areas. The officials spoke on condition of anonymity because they weren’t authorized to speak on the record.

Bush also wants the FHA to be able to help other risky borrowers, beyond the 80,000, by broadening its lending criteria. To compensate for the added risk that the borrowers might default, the FHA would charge them higher premiums on the loans. Also, he wants to eliminate the 3% down payment requirement, though borrowers would have to pay at least some of the closing costs to secure the loan.

The senior officials avoided using the word “bailout,” but the plan is sure to incite critics.

“If you’re going to help someone to refinance, you’re going to bail out the person who financed him in the first place,” Peter Wallison of the American Enterprise Institute said Thursday night. “This will only cause the problem to arise again.”

Wallison said the lenders who provided the financing in many of these cases likely knew that the borrowers couldn’t meet the financial obligations of the loan.

“If we’re going to allow (lenders) to be refinanced out, what we’re doing is saving them from their own greed. … It might be good politics, but it’s very bad policy.”

In another bold step, Bush will propose a temporary change in tax law. It would let homeowners avoid taxes on forgiven debt if a lender agrees to alter the terms of a loan.


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