Reform is coming, but look at what's just around the corner....

As we mentioned on our last call, it appears that FHA will be implementing the program that Clem Ziroli Sr. of First Mortgage in California proposed last March.  Below is the update that we prepared based on the information that we have gathered.

P2 believes it is extremely likely that FHA will be announcing a refinance program for homeowners that have encountered payment problems due to the reset of their adjustable rate mortgage loans.    We believe the announcement could come as early as the week of Labor Day.

There have already been a spate of activity recently about this proposal.   At his press conference in early August, President Bush mentioned FHA  refinance flexibility as part of a possible solution to the current mortgage market problems. On August 22^nd , the Wall Street Journal ran a story indicating that the Bush Administration is exploring ways that the FHA program could help subprime borrowers avoid foreclosure.  On August 23^rd, Senator Dodd, Chairman of the Senate Banking Committee, wrote a letters to Treasury Secretary Paulson and HUD Secretary Jackson asking them to make changes expeditiously to FHA  "to help borrowers escape these mortgages by refinancing them into more affordable loans."  While National Mortgage News Online also reported last Thursday that FHA has not made a final decision on any program,  we believe it is appropriate to begin preparing for the implementation of this program.   

FHA Refinance Program Would Likely Be Effective Immediately

Since FHA does not need any new legislation to implement this program, it would likely be effective immediately (upon publication as a mortgagee letter).  FHA can use its existing refinance authority to offer prime rate financing to eligible homeowners faced with higher mortgage payments as a result of the reset in the interest rate of their ARM loans (e.g.  2/28 and 3/27 loans). 

FHA Would Be Waiving the Requirement That Existing Loan Be Current

FHA's principal change  would be to waive its standard prohibition on delinquent borrowers.  Below are the likely elements of the program (though they are subject to change).

1.       A homeowner could be eligible to refinance their delinquent loan if the delinquency was caused by an increase in their mortgage payment as a result of an interest rate reset.   The homeowner would be required to show an acceptable credit history (outside of the mortgage delinquency) and a capacity to repay the new FHA loan (and any second liens already in place). 

2.      FHA's limitations on maximum loan amount and loan to value ratios are set by law.  The maximum LTV therefore will range from 97.15% to 98.75% depending on the location of the property and the amount of the loan.   Based on current FHA policy, FHA will likely permit the homeowner to refinance the unpaid balance of the first mortgage, the unpaid balance of any purchase money second mortgage, closing costs, prepaid expenses, prepayment penalties, and late charges.  As part of this new program, FHA will likely permit some amount (possibly 6 months) of delinquent mortgage payments subject to the maximum loan amount limitation.  The upfront MIP may be added to exceed the maximum loan amount

3.      FHA regulations do not permit any new second liens to be added at closing (unless the second when combined with the first does not exceed FHA's  maximum LTV requirements)  to cover any shortfall from the difference between the existing loan balance, closing costs, etc and the maximum amount of the FHA loan based on a current appraisal.  The current mortgage holder could "write down" the amount of the shortfall to permit the FHA refinance transaction.

4.      A new appraisal would be required by an FHA-approved appraiser.  All borrowers would be required to meet standard FHA underwriting criteria (e.g. 31/43 ratios), with full documentation and validation of income, assets, credit and employment.

5.      While it could be argued that these loans may be less risky than a typical FHA loan, it is possible that FHA could implement a higher premium structure based on the recent comments of the FHA Commissioner.