The Bush administration today rolled out a plan officials said was geared at helping up to 700,000 homeowners avoid foreclosure in the next two years, but which is not intended as a bailout of mortgage lenders who are facing mounting losses on bad loans.
The plan gives the Federal Housing Administration the authority to insure loans for delinquent borrowers facing foreclosure. Administration officials said the new “FHASecure” program will allow FHA to guarantee an additional 60,000 refinance loans a year.
Because borrowers pay premiums on FHA mortgage insurance, the program is expected to pay for itself and can be implemented immediately as an administrative action.
“We will enact it today, but it will probably be Tuesday (before the program goes into effect) given the long weekend,” a senior Housing and Urban Development official speaking on background told reporters in a conference call today.
A plan to introduce risk-based pricing in January is also expected to allow FHA to help an additional 20,000 troubled borrowers refinance into conventional loans. All told, HUD expects to boost FHA-backed refinancings to 240,000 in the current fiscal year, compared with a projected 160,000 under previous existing programs.
HUD estimates that the introduction of risk-based pricing — which will allow borrowers who previously would not have qualified for FHA programs to participate by paying slightly higher premiums — will help an additional 120,000 home buyers a year obtain FHA-backed purchase loans.
While the Center for Responsible Lending has projected that more than 2 million homeowners have lost or will lose their homes to foreclosure in the next two years, the HUD official said such estimates include vacation homes and investment properties purchased by speculators using subprime loans.
“We think ultimately there may be 600,000 to 700,000 people we can assist through this program over a two-year period,” the HUD official said. “Unfortunately, there will be some families we will be unable to help.”
The FHASecure program will be geared toward borrowers who have become delinquent on their adjustable-rate mortgages because of interest-rate resets. It will be available only to those who meet FHA’s underwriting guidelines, which currently includes a requirement that borrowers have at least a 3 percent equity stake in their homes. The program will insure loans only for borrowers who had a good payment history for six months prior to the interest-rate reset that caused their delinquency.
Borrowers seeking to refinance under FHASecure must obtain a new appraisal and be able to demonstrate they can repay the loan. But there is no minimum FICO score, and outstanding late payments can be refinanced into the new loan as long as the 3 percent equity requirement is maintained.
The plan rolled out by the Bush administration also calls for the Treasury and Housing and Urban Development departments to identify borrowers who are in danger of defaulting, and work with private lenders and mortgage repurchasers Fannie Mae and Freddie Mac to provide new loans that could help them keep their homes.
“The government has got a role to play — but it is limited,” Bush said at a White House press conference. “A federal bailout of lenders would only encourage a recurrence of the problem. It’s not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford. Yet there are many American homeowners who could get through this difficult time with a little flexibility from their lenders, or a little help from their government. So I strongly urge lenders to work with homeowners to adjust their mortgages.”
Bush also asked Congress to change a provision of the tax code that can penalize borrowers who are able to negotiate forgiveness of part of their mortgage debt. The Internal Revenue Service currently considers cancelled mortgage debt as taxable income, which can complicate the process of working out loan modifications or holding a short sale in exchange for forgiveness of debt.
“If the bank modifies your mortgage and forgives $20,000 of your loan, the tax code treats that $20,000 as taxable income,” Bush said. “When your home is losing value and your family is under financial stress, the last thing you need to do is to be hit with higher taxes.”
The National Association of Realtors issued a statement welcoming the administration’s actions, saying “FHA can now help many more families in jeopardy” of losing their homes.
Bush also called on Congress to pass an FHA modernization bill that would allow the administration to expand risk-based pricing, reduce down-payment requirements on loans it guarantees, and raise loan limits in high-cost states like California and New York from $363,000 to $417,000.
In a statement, Mortgage Bankers Association Chairman John Robbins said many of the proposals rolled out today “are ones for which we have long advocated, even before the recent troubles in the subprime mortgage market.” Robbins said he hoped the “president’s attention to turmoil in the mortgage markets … would encourage Congress to take the needed steps to reform FHA.”
As he concluded his press conference, Bush disregarded the final question directed his way.
“Sir, what about the hedge funds and banks that are overexposed on the subprime market?” the president was asked. “That’s a bigger problem. Have you got a plan?”
Although Bush did not delve into the subject, Federal Reserve Chairman Ben Bernanke delivered a speech on the topic today at an economic symposium in Jackson Hole, Wyo.
Bernanke gave no indication in the speech that the Fed will move to cut a key short-term interest rate at a Sept. 18 meeting.
Some economists say slashing the federal funds rate — the rate banks charge each other for overnight loans — would encourage borrowing. But Bernanke said that because the majority of mortgage loans are now securitized and sold to private investors in the secondary market — rather than held in the portfolios of banks and other institutions — short-term interest rates aren’t as important to housing markets as they once were.
About 56 percent of the home mortgage market is now securitized, compared with only 10 percent in 1980 and less than 1 percent in 1970, Bernanke said.
As a result, “the availability of mortgage credit today is generally less dependent on conditions in short-term money markets, where the central bank operates most directly,” Bernanke said.
While acknowledging the potential threat disruptions in the mortgage lending industry pose to the economy at large, Bernanke said that some increase in the premiums investors require to take risk is “probably a healthy development.”
“In recent months we have seen a reassessment of the problems of maintaining adequate monitoring and incentives in the lending process, with investors insisting on tighter underwriting standards and some large lenders pulling back from the use of brokers and other agents,” Bernanke said. “We will not return to the days in which all mortgage lending was portfolio lending, but clearly the originate-to-distribute model will be modified — is already being modified — to provide stronger protection for investors and better incentives for originators to underwrite prudently.”
