Piney Orchard Mortgage News - FHA Adjustable Rate "Bail Out"?

We are only seeing a few foreclosures/bank owned properties in Piney Orchard so far, but chances are within the next 18 months we will see many more as adjustable rate mortgages kick-in.  Now that market values for Piney Orchard real estate have dropped properties are not as easily refinanced.  The reason being that homebuyers who have purchased with 100% financing after 2005 have actually seen a decrease in value. Therefore, it's difficult to refinance the full amount for those borrower's that can least afford a down payment.

This article that was posted on bankrate.com give a very thorough description of the new FHA program.

As millions of homeowners lie bleeding in the Subprime Corral, the feds ride in on an old mare to rescue a few borrowers suffering from scratches.

The bailout plan, called FHASecure, is designed to prevent foreclosures among homeowners who fell behind because the rates went up on their adjustable-rate mortgages. About 60,000 "delinquent-yet-creditworthy" mortgage borrowers will be able to refinance into FHA-insured home loans in the next year or so, an official with the Federal Housing Administration says.

It's a triage operation, with the FHA aiding the delinquent borrowers who are easiest to patch up. The rescued borrowers will be dwarfed by the number of struggling homeowners who won't qualify for FHA refinances. "Unfortunately, we think there will be some families that we won't be able to help," the FHA official says.

People who refinance under the FHASecure program will end up with fixed-rate mortgages, which are quite popular nowadays among people who were burned by rising rates on ARMs. The FHA doesn't lend money; it insures mortgages made by lenders. The agency's Web site has a search engine to find FHA-approved lenders.

 
Key factors of the FHA bailout plan:
 
 
• FHASecure is geared toward the homeowner with an ARM who was paying on time until the rate was reset and the monthly payment went up.
• There are loan-size limits that make these mortgages unworkable for high-cost markets, such as most of California.
• Borrowers will need at least 3 percent equity, the FHA won't help people who owe more than their houses are worth.
• The application deadline is the end of 2008.
 

Is it déjà vu all over again?
The FHA is a 73-year-old packhorse that was foaled during the Great Depression. In 1934, foreclosures were skyrocketing, house values were plummeting, and house sales and construction were at a standstill. In those days, people got balloon mortgages that lasted for five years, and then they were expected to refinance at a new rate. In that respect, those home loans were somewhat similar to today's adjustable-rate mortgages. Like today, many homeowners back then had trouble making their payments and they couldn't find refinancing.

"The housing industry was still flat on its face with mortgage money frozen, 2 million men unemployed in the construction industry and properties falling apart for lack of money to pay for repairs," says the FHA's self-published history of its first 25 years. The FHA was created to insure mortgages, reducing the risk to lenders and making them more likely to lend. The agency carried a lot of cargo during the decades after the Depression. But after the 1980s, the FHA grew feeble. As recently as the mid-'90s, more than one-tenth of mortgages were FHA-insured; this year, its share is around one-fiftieth. As the FHA shed its burden, piggyback loans and uninsured subprime mortgages took it up.
 
 
 
Some critics wondered publicly whether the FHA should be humanely destroyed. But then came this year's subprime meltdown. Most subprime borrowers have adjustable-rate mortgages, and at the end of June, one in six subprime ARM borrowers was at least a month past due on the payments, according to the Mortgage Bankers Association. About two in 25 subprime ARMs were in foreclosure. The delinquency and foreclosure rates were rising.
In light of the subprime delinquency and foreclosure epidemic, the FHA believes it is relevant again. Federal housing officials intend to saddle up FHA and make it carry a bigger load. FHASecure constitutes the first of those efforts. It's intended to help ARM borrowers who can't make their payments after rate reset and who have trouble finding conventional lenders that are willing to lend at affordable rates.

"FHASecure is designed for families who are good borrowers but were steered into high-cost loans with teaser rates," FHA commissioner Brian Montgomery says.

It's hard to estimate the size of that market. The Center for Responsible Lending estimates that 2.2 million subprime loans will go into foreclosure over the next several years. Christopher Cagan, director of research and analytics for First American CoreLogic, has estimated that 1.1 million foreclosures will result from rate resets through the end of 2012, affecting both prime and subprime borrowers.

The FHA estimates that it can help 60,000 ARM borrowers refinance in the next fiscal year. FHA officials say the agency isn't going to solve the foreclosure problem all by itself, and that's not the intent.

Who qualifies for assistance?
According to FHA guidelines that were sent last week to lenders, the FHASecure refinance program is available only to borrowers who made all their payments on time during the six months before the ARM rate was adjusted upward. (In practice, "on time" means less than 30 days late, so making a few payments two weeks late won't disqualify borrowers.)
Borrowers can get FHASecure loans even if they are up to six months behind on the payments on their non-FHA ARMs. But borrowers have to prove that they fell behind because of the rate reset and not for another reason, such as a job layoff.

"The FHASecure initiative ... is not to be used to solicit homeowners to cease making timely mortgage payments," the agency admonishes in its letter to lenders. So don't let anyone talk you into making late payments on purpose.

Borrowers can roll the unpaid payments into the new loan.

FHA-insured loans have maximum amounts that vary depending on how expensive a housing market is. In the continental United States, the loan limit tops out at $362,790 for a single-family house in the priciest markets. That would be the limit in, say, Los Angeles. In a less expensive market -- Toledo, Ohio, for example -- the limit is $200,160. The FHA's Web site has a loan limit guide. If they need more than the FHA maximum, borrowers will be permitted to get uninsured piggyback loans for the difference -- if the FHA determines that they can afford the combined monthly payments. Total house payments can't exceed 31 percent of monthly income before income taxes.

FHA to adopt 'risk-based pricing'
The FHA requires refinancers to have at least 3 percent equity. That's a problem for people whose homes have lost value, so that they owe more than the house is worth. That's the case with a lot of homeowners in formerly blistering housing markets, such as South Florida, where people got mortgages for 95 percent or more of their homes' values, only to watch those values plunge when the markets went cold.

Jim Sahnger, mortgage consultant with Palm Beach Financial Network in Stuart, Fla., says customers have called to ask him about FHASecure, and he has to break the news that it won't help. "One problem is that so many people in this area are upside down," he says. "You've got to have something in it to make it worthwhile."

The FHA suggests that some lenders might be willing to partially forgive debts so delinquent borrowers can meet the 3 percent threshold and refinance their loans. While it might sound unlikely that lenders would let borrowers off the hook like that, writing off partial debts could be cheaper than foreclosing.

"Foreclosures are usually in bad shape," says Paul Halpern, a partner with Chrysalis Capital Partners, a private equity fund. "It makes those assets tough to sell, relatively." And lenders might choose to forgive partial debts rather than sell foreclosed houses in declining markets.

The deadline for applying under the FHASecure program will be the last day of 2008. An extension is possible, but not a sure thing.

In the meantime, FHA insurance premiums will rise for some new borrowers, because the agency plans to adopt "risk-based pricing" -- in essence, making riskier borrowers pay more for insurance. The FHA has talked for years about adopting risk-based pricing. Last year, the Congressional Budget Office reported that "developing and maintaining the appropriate systems for managing a risk-based pricing structure would take FHA several years to implement." But the FHA says it can do the job in four months and offer risk-based pricing at the beginning of 2008.

Michael Moskowitz, president of Equity Now, a New York-based mortgage lender, says "it's not such a big deal" to move to risk-based pricing with today's technology. "It's a simple thing to do, really," he says -- especially if the FHA were to buy the technology from a company such as Fannie Mae or Freddie Mac.

Anthony Sanders, professor of finance and real estate at Arizona State University, isn't nearly so sanguine. He points to this year's subprime meltdown, which burned a lot of sophisticated money managers on Wall Street. "Does the Bush administration really believe that the FHA can perform risk analysis better than Wall Street, particularly when the FHA has not done risk-based pricing in the past?" he says.

It's difficult to sort out the "good" from the "bad" subprime borrowers, Sanders says -- "That is, someone with poor credit who had a rash of illnesses and medical bills versus someone that is just an irresponsible borrower. ... And we are supposed to believe that the FHA is up for this game when all others have failed?"

The FHA intends to gallop in for the rescue, despite the odds.

Article courtesy of Bankrate.com

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