The Bush administration on Wednesday announced it will expand the FHASecure loan guarantee program to allow an additional 100,000 families to refinance into more affordable mortgages, as Democrats kicked off a two-day hearing on a more ambitious, $300 billion FHA expansion plan.
The Bush administration’s plan to expand the FHASecure loan refinancing program would give the Federal Housing Administration the ability to insure loans made to refinance borrowers out of mortgages when they have missed a few payments or received principal write-downs from lenders.
The expanded FHASecure program creates two new categories of eligible borrowers:
- Borrowers with adjustable-rate mortgage (ARM) loans who were late on two consecutive monthly mortgage payments or at two different times over the previous twelve months. FHA will require a 97 percent loan-to-value (LTV) ratio for these borrowers to refinance — the standard now in force.
- Borrowers with ARM loans who were late on three consecutive monthly mortgage payments or at three different times over the past 12 months. FHA will require a 90 percent LTV ratio for these borrowers to refinance.
The Department of Housing and Urban Development says FHASecure has helped 150,000 borrowers refinance since the program was launched in August. The expanded guidelines will allow a total of 500,000 homeowners to take advantage of the program by the end of the year, the administration projects — 100,000 more than previously projected. The FHASecure program accounts for $28.5 billion of the $68 billion in loans FHA has helped facilitate since September.
Critics of the plan say that it will only help a fraction of homeowners facing interest rate resets on ARM loans, or who may walk away from homes because declining home prices have left them without equity.
The plan put forward by Democrats would authorize FHA to refinance up to 2 million loans when lenders agree to write-down loan principal.
Lenders and investors would absorb substantial losses, as they would have to take 85 percent of a property’s current appraised value — more than they might get in a foreclosure, and protecting them against greater losses if property values continue to decline.
FHA would only insure mortgages in which borrowers have debt-to-income ratios of no more than 40 percent, unless they had made six months of payments that equaled or exceeded their new loan payment.
Only owner-occupied residential mortgage loans originated on or after Jan. 1, 2005, and before July 1, 2007, would be eligible for consideration.
The plan, proposed by Rep. Barney Frank, D-Mass., is the subject of a two-day hearing before the House Financial Services Committee. While some Bush administration officials liked aspects of the plan, Assistant Secretary for Housing Brian Montgomery warned Congress not to federalize the "housing market."
Montgomery said that while there was "a lot of common ground here given our shared interest in using FHA to help many Americans," the administration nevertheless has "serious concerns about several provisions" of Frank’s proposal.
Montgomery testified that the plan mandates a loosening of underwriting standards "that could saddle borrowers with unacceptably high debt payments, placing them and the FHA fund at risk," and said said the expansion of the FHASecure program was a better alternative.
Frank maintains the program would pay for itself because claims would be funded by premiums collected from borrowers. The program would impose a single premium payment of 5 percent of the amount of the original insured principal obligation of the mortgage, and asses the borrower a 1.5 percent annual premium payment. To prevent borrowers from profiting if housing prices rebound, they would be charged an exit premium on a sliding scale of at least 3 percent.
Democrats also propose providing $10 billion in loans and grants for state and local governments to purchase and rehabilitate vacant homes with the goal of getting them occupied as soon as possible. The administration views that aspect of the plan as "a taxpayer bailout of lenders and speculators," Montgomery said, because it would mainly benefit private lenders who are the owners of the vacant homes.
But other administration officials were more receptive to the plan. In her prepared testimony before the committee, FDIC Chairwoman Sheila Bair said Frank’s plan, while not perfect, "would make effective use of existing governmental and market structures," and significantly reduce the time and expense of providing foreclosure relief.
While FHA lost market share to subprime lenders during the housing boom, Bair said using FHA as a vehicle to refinance some portion of these troubled loans "will return FHA to its traditional role of meeting the needs of low- and moderate-income borrowers and stabilizing housing markets."
Bair warned that while additional premiums charged to borrowers would create a significant reserve against losses, it’s unknown if those reserves could cover all claims arising from the new loan guarantees — meaning taxpayers might be on the hook.
Lenders are likely to keep the best loans on their books, and "adverse selection" would likely leave FHA with mortgages where borrowers owe substantially more than the property is worth or have demonstrated little ability or willingness to repay, Bair said.
Bair also said a "major difficulty" in refinancing many troubled mortgages is the presence of second liens, because those creditors may stand in the way of refinancing a first loan.
With an estimated 1.72 million hybrid adjustable-rate mortgage (ARM) loans scheduled to reset this year and next, Bair said the FHA’s "resources will be significantly stretched to deal with the possible influx of applications" if the program is enacted. In recent years, the FHA has only been insuring about 500,000 single-family loans a year.
Loan servicers will also have to devote "significant resources" to writing down loans, Bair said. To provide servicers with a financial incentive to take on the work — and reduce the risk of adverse selection — Bair recommended Congress consider requiring investors to initially settle for 80 percent of a property’s current appraised value, with an additional 5 percent being released to the servicer and investment pool over three years as long as the loan continues to perform.
Comptroller John Dugan testified that if the program did prove to be an attractive and less costly alternative to foreclosure, it could save national banks “significant amounts over time” and help prevent further reductions in home prices by keeping more borrowers in their homes.
John Reich, direcotr of the Office of Thrift Supervision, said that OTS has put forward its own foreclosure relief plan. But he said both the OTS plan and the proposal put forward by Democrats are similar in that they would use the proceeds of FHA-guaranteed loans to pay existing loan holders via a short sale or partial payoff, providing "a significant new tool to servicvers and lenders seeking to avoid preventable foreclosures."