Mortgage Woes 2007
FHA

Mortgage Market Woes: FHA Secure Passed by House

This year has been a year of ups and downs for the housing market. In our continuing series, we chronicle news affecting the housing market and its major players.

The House on Tuesday passed portions of the FHASecure plan, an initiative to expand federal backing of mortgages and help homeowners avoid foreclosure.

The bill passed the House with bipartisan support on a vote of 348-72. If passed by the Senate, the program would allow the Federal Housing Administration to back refinanced loans for an increasing number of borrowers who are delinquent on payments because rates are resetting from initial teaser levels.

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This FHA Modernization project, named FHA Secure by the agency, aims to expand the number of homeowners and families who can benefit from FHA support. FHA insures mortgages for low- and middle-income borrowers and enacts other initiatives to increase homeownership across the country.

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In a statement, Housing and Urban Development Secretary Alphonso Jackson said, “The bipartisan reforms overwhelmingly passed by the House serve as a starting point to bring good news to families who need a safe, fair and affordable FHA alternative to the exotic subprime market. Now more than ever, Americans want financially sound mortgage options that won't turn the dream of homeownership into a nightmare. With the bill approved by the House today, we estimate FHA will be able to help hundreds of thousands of borrowers obtain an FHA-insured mortgage in 2008."

Disagreement exists over specific provisions, including the limits of mortgages able to be insured by the FHA, and whether the bill will include tightening of government oversight on mortgage finance giants Fannie Mae and Freddie Mac. Several representatives and senators are creating their own versions of the bill that will compete for eventual passage.

An estimated 2 million to 2.5 million adjustable-rate mortgages are scheduled to "reset" this year and next, jumping from low "teaser" rates for the first two or three years to much steeper rates that cause borrowers to default and eventually foreclose. At the same time, turbulent financial and credit markets resulting from the mortgage upheaval has raised fears of economic downturns and a recession. The FHA program aims to help some subprime or high-risk borrowers faced with increasing intersest rates on adjustable-rate mortgages. By insuring loans, FHA makes its mortgages more affordable for borrowers and less risky for lenders.

FHASecure offers homeowners the chance to refinance into better loans. Assuming borrowers can meet the to-be-determined loan limit, there are five criteria for FHASecure eligibility:

A history of on-time mortgage payments before the borrower's ARM teaser rates expired and loans reset;
Interest rates must have or will reset between June 2005 and December 2009;
Three percent cash or equity in the home;
A sustained history of employment; and
Sufficient income to make the mortgage payment.

Under existing rules, loans that exceed $362,000 are not FHA eligible. This has effectively eliminated the program along the East and West Coasts where house prices are higher. The program also required borrowers to make a substantial down payment. The proposed reform would lower the down-payment requirements and raise the limit on the size of loans that FHA can insure. The previous limit was $362,000 in states with high home prices; the new upper limit is still under decision, but the initial recommendation was for $417,000.
The passage of FHA Secure marks Congress' first stand-alone bill in response to the mortgage-market tumult of the summer. The Senate last week approved spending legislation that includes $200 million in aid to nonprofits and other groups that offer counseling and information to help homeowners avoid foreclosure.

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