The Department of Housing and Urban Development gave lenders the go-ahead last week to start refinancing delinquent subprime borrowers into Federal Housing Administration loans.
The emergency program is designed to give certain subprime borrowers with adjustable-rate mortgages a refinancing option to avoid foreclosure.
It is a key component of the Bush administration's efforts to mitigate the fallout from the subprime mortgage debacle.
Under the program, borrowers that were current on their monthly payments up to the time of the reset of their ARM can qualify for a new FHA-insured mortgage, according to the FHA mortgagee letter that spells out the requirements for the refi program.
Eligible homeowners can roll missed payments in their new FHA loan but they can't go above a 97.75% loan-to-value ratio on the first mortgage, based on a new appraisal.
But the FHA will allow a second lien to provide some flexibility for borrowers who have experienced a decline in property values and can't afford the closing costs or late fees. "That is nice feature," said FHA consultant Bud Carter. "They really made an effort to try and reach a lot of these borrowers." Mr. Carter is with Potomac Partners in Washington.
President George Bush announced the creation of the FHA refinancing program, which is call "FHA Secure," just before the Labor Day weekend. The FHA Secure program will give "many families who are struggling" an opportunity to refinance into FHA-insured mortgages and keep their homes, the president said.
The president stressed that it is not a "bailout" for lenders or speculators. But he said the government has a role to play in helping American homeowners "get through this difficult time." FHA Secure is a temporary program, however, and it is set to end by the end of calendar year 2008.
President Bush also said the Department of Housing and Urban Development will issue a Real Estate Settlement Procedures Act proposal soon to "require mortgage brokers to fully disclose their fees and costs."
HUD is expected to issue a proposal later this fall that revamps the good-faith estimate disclosure that borrowers receive shortly after signing an application for a mortgage.
The president also called on Congress to pass FHA reform legislation that would increase FHA loan limits, lower downpayment requirements and offer more flexibility in pricing mortgage insurance premiums.
The House is on track to pass an FHA reform bill quickly, possibly this week. But it is unclear when the Senate Banking Committee will be able to reach a consensus on FHA reforms.
Meanwhile, HUD estimates the FHA will refinance over 100,000 subprime borrowers into FHA loans by the end of this fiscal year, which ends Sept. 30. And the FHA could refinance another 160,000 subprime borrowers in FY 2008 without any changes to its program.
With the new FHA Secure program, HUD expects to reach another 60,000 subprime borrowers because the FHA will be able to refinance delinquent borrowers for the first time.
HUD officials say they can reach even more subprime borrowers by implementing risked-based pricing. And the department is planning to implement risked-based pricing through an administrative action, if Congress does not pass an FHA bill by Jan. 1.
By pricing its mortgage insurance premiums by credit risk, the FHA could help another 20,000 subprime borrowers refinance into a new FHA-insured mortgage in FY 2008 and help 120,000 new homebuyers who have fewer financing options due to the contraction in subprime lending, a HUD official said.
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