FHASecure Fed offers mortgage bailout E-mail
As millions of homeowners lie bleeding in the Subprime Corral, the feds ride in on an old mare to rescue a few borrowers suffering from scratches.

The bailout plan, called FHASecure, is designed to prevent foreclosures among homeowners who fell behind because the rates went up on their adjustable-rate mortgages. About 60,000 "delinquent-yet-creditworthy" mortgage borrowers will be able to refinance into FHA-insured home loans in the next year or so, an official with the Federal Housing Administration says.

It's a triage operation, with the FHA aiding the delinquent borrowers who are easiest to patch up while leaving the majority of struggling homeowners behind.

People who refinance under the FHASecure program will end up with fixed-rate mortgages. Key factors:

  • FHASecure is geared toward the homeowner with an ARM who was paying on time until the rate was reset and the monthly payment went up.
  • There are loan-size limits that make these mortgages unworkable for high-cost markets, such as most of California.
  • Borrowers will need at least 3 percent equity; the FHA won't help people who owe more than their houses are worth.

    The FHA was created in 1934 to insure mortgages, reducing the risk to lenders and making them more likely to lend. As recently as the mid-'90s, more than one-tenth of mortgages were FHA-insured; this year, its share is around one-fiftieth. As the FHA shed its burden, piggyback loans and uninsured subprime mortgages took it up.

    Then came this year's subprime meltdown. Most subprime borrowers have adjustable-rate mortgages, and at the end of June, one in six subprime ARM borrowers was at least a month past due on the payments, according to the Mortgage Bankers Association. About two in 25 subprime ARMs were in foreclosure. The delinquency and foreclosure rates were rising.

    In light of the subprime delinquency and foreclosure epidemic, FHASecure constitutes an effort to make the FHA relevant again. It's intended to help ARM borrowers who can't make their payments after rate reset and who have trouble finding conventional lenders willing to lend at affordable rates.

    It's hard to estimate how many borrowers fall into that category. The Center for Responsible Lending estimates that 2.2 million subprime loans will go into foreclosure over the next several years. Christopher Cagan, director of research and analytics for First American CoreLogic, has estimated that 1.1 million foreclosures will result from rate resets through the end of 2012, affecting both prime and subprime borrowers.

    The FHA estimates that it can help 60,000 ARM borrowers refinance in the next fiscal year. FHA officials say the agency isn't going to solve the foreclosure problem all by itself, and that's not the intent.

    According to guidelines that were sent last week to lenders, the FHASecure refinance program is available only to borrowers who made all their payments on time during the six months before the ARM rate was adjusted upward. (In practice, "on time" means less than 30 days late, so making a few payments two weeks late won't disqualify borrowers.)

    Borrowers can get FHASecure loans even if they are up to six months behind on the payments on their non-FHA ARMs. But borrowers have to prove that they fell behind because of the rate reset and not for another reason, such as a job layoff.

    Borrowers can roll the unpaid payments into the new loan.

    FHA-insured loans have maximum amounts that vary depending on how expensive a housing market is. In the continental U.S., the loan limit tops out at $362,790 for a single-family house in the priciest markets. That would be the limit in, say, Los Angeles. In a less expensive market -- Toledo, Ohio, for example -- the limit is $200,160.

    The FHA requires refinancers to have at least 3 percent equity. That's a problem for people whose homes have lost value, so that they owe more than the house is worth.

    Jim Sahnger, mortgage consultant with Palm Beach Financial Network in Stuart, Fla., says customers have called to ask him about FHASecure, and he has to break the news that it won't help. "One problem is that so many people in this area are upside down," he says. "You've got to have something in it to make it worthwhile."

    The FHA suggests that some lenders might be willing to partially forgive debts so delinquent borrowers can meet the 3 percent threshold and refinance their loans. While it might sound unlikely that lenders would let borrowers off the hook like that, writing off partial debts could be cheaper than foreclosing.


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