A little-discussed addition to the Bush Administration's plan to help stop foreclosures last year was the addition of a new FHA loan product called FHASecure.  The idea behind this plan is to relax qualifying restrictions somewhat so that people who have ARMs (Adjustable Rate Mortgages) that are resetting can get into a new loan and continue to make timely payments.

 That sounds like a good plan, right?  Let's talk about the details.

1) FHASecure mortgages will only be available through the end of this year.  The application must be signed on or before December 31, 2008.

2) FHASecure allows for loan amounts and combined loan-to-value ratios to be higher than normal FHA guidelines.  However, they still require close to 3% down OR, more accurately in this case, nearly 3% equity in the home.

3) The current loan does not have to be delinquent to qualify.

4) The current loan can be delinquent, BUT the delinquency must have occurred because the current mortgage rate was adjusted or reset.  Mortgage payments must have been current for the past 6 months prior to the reset.

5) FHASecure can be used to refinance Non-FHA ARMs that are either current or delinquent or Non-FHA fixed rate loans that are current.  In addition, borrowers with a Non-FHA Payment Option or Interest Only loans that are current or are delinquent due to reset can utilize this program.

Here's the fun part:

6) If the current loan amounts exceed 97-98% of the property value (97.75% to be exact), then it is the borrower's responsibility to negotiate with their current lender to restructure, forgive or re-subordinate the remaining debt above the amount that the FHASecure loan will cover.

My Two Cents

This program is a nice idea, but will actually serve the needs of very little of the population.  In fact, since this program has been in place since the fall of 2007 only 10 of these loans have been made in Tucson, AZ.  Here's why.  Prices have fallen since most of these loans were originally made.  So the majority of borrowers are left owing more on the home than it is currently worth.  Since the FHASecure loan needs a small amount of equity in the home, the majority of borrowers are going to be left negotiating with their lenders to re-subordinate or forgive the remaining portion of the debt.  Some lenders might be willing to do this, especially if the amount is small because then they have a decent chance of recouping all the loan AND they can avoid having a foreclosure on the books.

However, how many homeowners are going to find this to be a workable solution?  If it is only a few thousand dollars, it would make sense because with the rate of increase in the value of Tucson homes, their increase in equity will cover that in a few short years, they will avoid foreclosure and they get to keep their home.  But what about those homeowners who now find themselves $100,000 short?  Given the option to just do a short sale and have that amount forgiven as opposed to waiting until the market increases enough to cover that, my guess is that most people would choose the short sale and start fresh.  An argument can easily be made that this option is not ethical and that people should pay back what they borrowed.  However, the government has made it easy in this case for people to have their debt "forgiven" and I can see why a great many people would choose to go that route.

This deal will be a great choice for those who are making their current payments but need to refinance now that their rates are resetting.  Perhaps someone who can't fit into a usual FHA loan due to a higher LTV (Loan to Value) would find this program useful.  However, considering that the value of the home needs to have remained almost constant or increased a little, I don't think that this deal will do much for more than just a handful of people.