WASHINGTON — Last week's session of the House Financial Services Committee was surprise to learn that the Federal Housing Administration will expand it FHASecure refinancing program.
Federal Housing Commissioner Assistant Secretary for Housing Brian D. Montgomery announced the expansion at a committee session. He said it will help more homeowners who are struggling to keep up with mortgage payments on high-cost subprime loans, Montgomery estimated the change would help about 500,000 families refinance into prime, FHA-insured mortgages by year-end. "We want to be able to help families who are in the right house but the wrong mortgage," said Montgomery.
The FHA expansion means that the agency will be more flexible with borrowers who have fallen behind on as many as three payments, allowing them to qualify for a new federally insured loan at the maximum 97% value of their homes. The change would also include borrowers who received a voluntary mortgage principal write-down from their lender. "Our plan will help hundreds of thousands of desperate families who have no place else to turn for safer, lower cost ways to keep their homes," said Montgomery.
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In August 2007, the FHA modified its refinancing program to help creditworthy homeowners who missed payments after their teaser rates reset. Now, FHASecure's expanded eligibility criteria cover borrowers with adjustable-rate mortgages who were late on two consecutive monthly mortgage payments or at two different times over the previous 12 months (FHA will require a 97% loan-to-value ratio for these borrowers to refinance, the same LTV as FHA's current standard). It will also cover borrowers with adjustable-rate mortgages who were late on three consecutive monthly mortgage payments or at three different times over the past 12 months, but the FHA will require a 90% LTV ratio for these borrowers to refinance.
The new criteria can help additional borrowers access a more viable refinancing option and will offer lenders an alternative to foreclosing on these individuals, said the agency. Lenders may voluntarily write down the outstanding subprime mortgage principal balances to a 97% or 90% LTV ratio, depending on the borrowers' circumstances. The FHA will also encourage lenders to make other arrangements, such as subordinate financing, to fill the gap between the existing loan balances and the FHA-insurable loan amount. The refinanced loan amount backed by the FHA would be based upon a new appraisal, performed by an FHA-approved appraiser.
The FHA will insure new, more affordable mortgages in exchange for this equity cushion, which will protect the FHA's insurance fund, and thus the taxpayer, against risk, said the FHA. Currently, the FHA's insurance fund is self-sustaining, requiring no appropriation of taxpayer dollars because homeowners pay for the product themselves. Further, any new FHASecure loans must continue to meet FHA's underwriting standards. Lenders will be required to ensure borrowers have the capacity to repay their mortgages, show a reasonable credit history and employment history, and fully document and verify their incomes.
Borrowers will be required to pay upfront and annual premiums on their loans, which directly contribute to the soundness of FHA's insurance fund and protect taxpayers. FHA will also be simultaneously updating the pricing policy for these premiums. The new policy will base premiums on the individual borrower's credit-risk profile. More than 90% of FHA-backed loans are 30-year, fixed-rate mortgages. Homeowners currently using FHASecure are saving $400 a month on average compared to their previous subprime loans, according to the agency.
"More homeowners continue to turn to FHA to find mortgage terms they can afford. We're keeping families in their homes while doing what's in the best interest of future generations who will rely on the safety and soundness of FHA to put a roof over their heads. The modifications to the existing FHASecure product offer a prudent, yet appropriate, way to help more families refinance without putting the government or taxpayers at risk. Consistent with FHA's historical mission, the changes are designed to help FHA provide additional liquidity and stabilize local real estate markets," Montgomery said.
The announcement took Committee Chairman Barney Frank (D-Mass.) by surprise, as he stated that his own plan, then under discussion, would help as many as 1.5 million borrowers. Frank also noted that the Bush administration and many Republicans on the committee were opposed to offering such help to distressed homeowners on grounds that it was too much meddling in the markets from government.
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